China Economic Briefing – 23 February 2015

Due to the Chinese New Year holiday period, there are limited partial economic indicators for January each year. That said, the data available points to a soft start – PMI measures are weak, imports slowed, inflation continues to soften and credit growth contracted.

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Data points to a soft start in 2015, but wait until post CNY for clear signals

Due to the Chinese New Year holiday period, there are limited partial economic indicators for January each year. The variable timing of the holiday means data for January and February does not necessarily provide a strong guide of underlying conditions. That said, the data available points to a soft start – PMI measures are weak, imports slowed, inflation continues to soften and credit growth contracted.

Global factors could influence the economic outlook for China in 2015 – particularly weaker oil prices. As outlined in our China Economic Update this month, we’ve modestly revised up our forecast for Chinese growth – to 7.1% in 2015 and 6.9% in 2016 (from 7.0% and 6.8% previously).

While economic modelling indicates that our forecast oil price could provide a stronger boost for China’s growth, we expect that Chinese authorities will take advantage of the oil price stimulus to lower public investment and continue the process of cleaning up shadow banking (and with it credit growth more generally).

In early February, the People’s Bank of China (PBoC) cut the Reserve Requirement Ratio (RRR) by 50 basis points (to 19.5% for large institutions) – the first change since May 2012. Based on January’s deposit levels, this could release around RMB 612 billion in liquidity – close to the level of capital outflow in the December quarter, suggesting that there is some merit to the PBoC’s minimal stimulatory argument.

For further analysis download the full report.