Chinese Monthly Update – July 2012

The Chinese economy continues to slow, albeit at a relatively controlled pace. Real GDP growth eased to 7.6 per cent, […]

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  • The Chinese economy continues to slow, albeit at a relatively controlled pace. Real GDP growth eased to 7.6 per cent, broadly in line with expectations, but the slowest pace in more than three years. Nevertheless, partial economic indicators are providing tentative signs of stabilising, with new loans increasing, while fixed asset investment and real retail sales growth both improved. Nevertheless, industrial production and exports growth remain soft.
  • In early July, the PBoC cut lending and deposit rates for the second time in less than a month as easing inflationary pressures provided more scope to support faltering domestic demand. Authorities emphasised the need to promote investment in the current economic environment, suggesting further policy stimulus may be in the works.
  • We have kept our forecast for China’s GDP growth unchanged at 7¾ per cent in 2012, and expect growth to bottom in either the June or September quarters. Recent policy stimulus isn’t expected to fully gain traction until mid-2013, pushing growth back towards potential (around 8 per cent). However, external risks and the potential for policy errors (particularly in real estate) could see the current slowdown becoming more ingrained.
  • We expect the PBoC to cut RRR two to three more times this year to help improve liquidity and shoreup growth. We also haven’t ruled out a third cut to interest rates, likely taking place this quarter, so long as inflation risks remain contained.

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