Visible signs of improvement in China

The GDP of the second economic power in the world grew by 7.4% year-on-year in the third quarter of 2012, less than the 7.6% of the previous quarter but in line with consensus forecasts. Similarly, in quarter-on-quarter terms and according to official sources, growth has improved from the figure of 1.5% in the first quarter, the year’s lowest level, to 2.2% in the third. This reasonably positive figure and other recent positive indicators point to a certain upswing for the Asian giant.

In this context, the slowdown in the CPI over the last few months, from an inflation rate of around 6.5% during the first half of the year to 1.9% in September, much lower than the government target of 4%, gave the central bank room for further monetary relaxation to boost the economy’s incipient recovery.

In addition, the moderation in food prices, one of the government’s priorities, allows further expansionary measures to be taken. We therefore expect the central bank to lower the official interest rate by 25 basis points to 5.75% before the end of the year.

The indicators for domestic demand continue to show signs of relative strength, boosted partly by the fiscal stimuli started in the second quarter. Specifically, retail sales grew by 14.2% year-on-year in September, once again within the range of 13%-14% of the last few months. Equally solid, the cumulative figure for urban investment in fixed capital from January to September rose by 20.5%, 0.3 percentage points more than the cumulative figure up to August.

The leading supply indicators in September have also improved. The purchasing managers’ index (PMI) for manufacturing rose slightly to 49.8 points, coming close to the expansionary zone indicated by 50 points. Industrial production grew by 9.2% year-on-year in September, more than August’s figure of 8.9% although here the real situation is less clear as electricity consumption, a more credible measure of the country’s industrial production according to some analysts, grew at a lower rate than August’s figure.

On the foreign front, September’s exports grew by 9.9% year-on-year in current terms, far above the 2.7% of the previous month, reinforcing the growing optimism surrounding China. Improvement has been concentrated in the markets of the United States and South East Asia. For their part, imports grew by 2.3% year- on-year, compared with the 2.7% drop in August, placing the trade surplus at 27.67 billion dollars.

In short, the fiscal stimuli started in the second quarter and the improvement in exports have reduced fears of a hard landing for the Asian economy. We expect this upswing to continue in the fourth quarter and beyond, supported by the infrastructure investment plans and new structural measures to boost domestic demand and services. However, the economic and political focus of the country’s new leadership will be key in this respect.