Must-know: Chinese Central Bank keeps interest rates unchanged
Interactive Buyside Weekly Thoughts for Market Realist
Drilling down a bit into the recent China 2Q GDP number, a few things stand out:
The real 7.5% headline rate was in line with expectations, but over the past month, estimates had fallen from 7.8% consensus
First half of year growth was 7.6%, so chatter is starting up discussing possibility of China missing its full year 7.5% estimate (China hasn’t missed a full year GDP estimate in 15 years)
Contribution of gross capital formation rebounded sharply as a percent of GDP (on a sequential and year-over-year basis) to offset net export decline
Below, we laid out the past ten years of quarterly nominal GDP growth for China, just to have a reference point as to the trends and levels of the historical versus recent GDP prints. In addition, we included the contributors of Chinese GDP in the second table.
(Read more: China’s wage inflation: Bad news for corporate profits and banks)
List of China’s Quarterly Nominal GDP and Growth (in 100 million of CNY) | |||||||||
Q1 | Q2 | Q3 (Read more: Why China triggered harmful emerging market outflows) | Q4 | FY Growth % | |||||
Year | GDP | Growth % | GDP | Growth % | GDP (Read more: Analysis: Why China’s export growth rates are slowing) | Growth % | GDP | Growth % | |
2013 | 118,855 | 9.6 | 8.0 | ||||||
2012 | 108,486 | 11.3 | 119,549 | 9.7 | 125,669 | 8.5 | 165,599 | 9.8 | 9.8 |
2011 | 97,480 | 18.0 | 109,009 | 18.1 | 115,857 | 18.5 | 150,759 | 17.0 | 17.8 |
2010 | 82,613 | 18.3 | 92,265 | 17.7 | 97,748 | 17.6 | 128,886 | 17.6 | 17.8 |
2009 | 69,817 | 5.3 | 78,387 | 5.7 | 83,100 | 8.6 | 109,599 | 13.0 | 8.6 |
2008 | 66,284 | 21.1 | 74,194 | 21.2 | 76,548 | 19.4 | 97,019 | 13.2 | 18.1 |
2007 | 54,756 | 20.8 | 61,243 | 22.2 | 64,102 | 23.5 | 85,709 | 24.3 | 22.9 |
2006 | 45,316 | 15.8 | 50,113 | 17.1 | 51,913 | 16.0 | 68,973 | 18.3 | 17.0 |
2005 | 39,117 | 17.0 | 42,795 | 15.7 | 44,744 | 13.1 | 58,280 | 16.8 | 15.7 |
2004 | 33,421 | 15.8 | 36,985 | 19.3 | 39,562 | 18.2 | 49,911 | 17.5 | 17.7 |
2003 | 28,862 | 13.7 | 31,007 | 10.9 | 33,460 | 12.6 | 42,494 | 14.0 | 12.9 |
Source: China NBS Quarterly Data
2012 GDP by industry
CNY was converted using the 6.19 CNY/USD exchange rate as of April 12, 2013.
Industry | 2012 GDP Value ($ billions) | % of Total GDP |
Industry & Manufacturing | 3,229 | 38.5% |
Other | 1,427 | 17.0% |
Farming, Forestry, Animal/Fishery | 846 | 10.1% |
Wholesale & Retail Trade | 812 | 9.7% |
Construction | 573 | 6.8% |
Real Estate | 469 | 5.6% |
Financial Intermediation | 462 | 5.5% |
Transport, Storage & Postal | 403 | 4.8% |
Hotel & Catering Services | 169 | 2.0% |
Total | 8,389 | 100.0% |
Source: National Bureau of Statistics of China
After 15 years of consistent and reliable GDP growth projections, I do not envision the Chinese government is ready to come in below expectations. Because of this, a few things might happen within the next five months:
An interest rate cut
An accelerated pace of infrastructure project approvals lead to inflation
Continued yuan devaluation
The Market Realist Take
The Chinese Central Bank decided in its quarterly policy meeting at the end of September to keep key interest rates unchanged. On July 20, it ended the floor on loan rates, paving the way for the liberalization of interest rates. The authorities also stated that Shanghai’s pilot-free trade zone will allow yuan (RMB) convertibility on a trial basis. By announcing these measures, the government is trying to thwart the buildup of domestic imbalances and improve economic growth.
The government has also loosened its monetary policies by speeding up investment in infrastructure, sustaining spending in public housing, and reducing taxes for small businesses. These “mini stimulus” measures seem to have resulted in modest rebounds in various sectors. The Chinese HSBC purchasing managers’ index, or PMI, was up 50.2% in September from 50.1% in August. The report stated that although output increased, the rate of growth slowed to a fractional pace. A report from the Beijing-based National Bureau of Statistics and Federation of Logistics and Purchasing stated that the non-manufacturing purchasing managers’ index increased to 55.4 in September from 53.9 in August.
However, there are concerns over whether this growth is really sustainable in the long run. Investors need to be cautious, and Japan’s WisdomTree Japan Hedged (DXJ) and the iShares MSCI Japan (EWJ), as well as the USA S&P 500 via the State Street Global Advisors S&P 500 SPDR (SPY) and Blackrock’s S&P 500 Index (IVV), may appear more attractive than China’s iShares FTSE China 25 Index Fund (FXI).
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