8/2/2019 Er20120413BullPhat Dragon A

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a weekly chronicle of the Chinese economy

Phat dragon

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# 103a

Phat Dragons forecast - put forward with the usual amount oftrepidation and a lavish helping of caveats - wasnt too far fromthe money in the end. The economy reportedly expanded 8.1%from a year ago in Q1 (consensus 8.4%, Phat Dragon 8.2%,lower bound of the credible forecast range 7%) down from8.9% in Q4 and 9.7% at this time in 2011. The slowdown in realGDP is significantly milder than that observed across a broadrange of other indicators of activity, but a volume decelerationof 1.8ppt over a year is certainly not a trivial one. In nominalterms the scale of deceleration is much larger, reflecting thedisinflationary state imposed by the austere policy environmentthrough 2011. Nominal GDP reportedly expanded by 11.2%yr inQ1, a steep decline from 16.6% in Q4 and 17.5% a year ago. Theimplicit price deflator is now just 3.1%yr, having been as high as9% just two quarters ago. A sharp downward move in the fixed

investment deflator (from 5.7% in Q4 to just 2.3% in Q1) was akey contributor there. In the quarter itself, the NBS estimatesthat the seasonal adjusted growth rate was 1.8%. Phat Dragonhas historically tended to be dismissive of these estimates. Somethings never change.

On the broadest sectoral basis, Phat Dragon notes that primary,secondary and tertiary activity are all now expanding at singledigit paces. That was the case for five quarters beginning in Q3 of2008 and it was the norm for the bulk of the Asian Crisis-bankingcrisis-tech wreck phase either side of the turn of the millennium.Otherwise, it just hasnt happened. While one can certainly arguethat the slowdown is not deep it is certainly broad.

As noted above, the deflator for capex slowed quite abruptly inQ1. Phat Dragon puts real fixed investment at 18.8%yr in March,against a nominal pace of 21.1%. The nominal value of projectsunder the auspices of local government have slowed from above30% last November to 23% in March while central projectsremain in negative growth territory. In terms of sectoral trends,manufacturing slowed, utilities firmed and transport narrowed therate of contraction carried from last year. Residential real estateslowed, with the nominal ytd rate below 20% for the first timesince December 2009. The volume of construction starts arenow contracting year-over-year (4%), joining sales (13%), whilecompletions are up (rhetorical pause) 32%.

Industrial production was basically steady at 11.9%yr in March,while Phat Dragons core index is showing signs of consolidatingin the mid to high single digit range, with a 5.8% outcome acrossQ1. Steel, energy and cement volumes have steadied around7-8%. Automobile output is bouncing around in the low singledigits while sales are basically flat in terms of unit growth, whilethe annualised level of sales is around 17 million, which isa touch below the average of 2011H2. Retail sales, a seriesthat does not have Phat Dragons seal of approval, came in at14.8%ytd, a moderate firming from February. Given that foodprices accelerated in March, it is safe enough to allocate thegain to a nominal effect on the price of staples, rather than adiscretionary rise in spending.

13 April 2012

Westpac Institutional Banking Group Economic Research economics@westpac.com.au www.westpac.com.au

The overall picture is of an economy that is in need of a moreaccommodative policy stance - the new evidence in favour ofPhat Dragon expounded in this mornings chronicle.

Stats of the week: The share of Chinas oil imports comingfrom Africa rose by 23ppts in the ten years from 1995.

Various measures of inflation

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5

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15

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5

10

15

Mar-04Mar-05Mar-06Mar-07Mar-08Mar-09Mar-10Mar-11Mar-12

%yr%yr

Fixed investment price index

Consumer price index

GDP implicit price deflator

Producer price index

Sources: CEIC, Westpac Economics.

10

15

20

25

30

6

8

10

12

14

16

Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Dec-13

%yr%yr

GDP (lhs)

M2 (rhs)

Sources: Westpac Economics, CEIC

Chinese GDP & the money supply

Key indicators: pace of slowdown easing

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Real GDP Core IVA Steel Cement Exports Imports Real fi xedinvestment

Housingsales

Auto sales

Dec-10

Dec-11

%yr

Sources: Westpac, CEIC.All indicators in volume terms except for importsand exports, which arenominal USDs.

%yr