China: Weak start for 2012 but no hard landing

Distortions due to the Lunar New Year imply that data for January and February are difficult to interpret but it is clear that activity in the Chinese economy has been weak at the start of 2012. GDP growth in the current quarter is likely to be weak. The recent development puts a downside risk to our above-consensus GDP forecast of 8.7 per cent growth in 2012. However, due to data distortions caused by the Lunar New Year and models indicating a rebound in activity in April we maintain our forecast for the time being. Headline inflation fell to 3.2 per cent in February. Food inflation dropped from 10.5 per cent in January to 6.2 per cent. (Chart 1)The large drop in inflation reflects the timing of the Lunar New Year and headline inflation might rebound somewhat in March, a higher than expected fuel price increase adding further upward pressure. Lower inflation provides opportunities for policy loosening in order to stimulate growth. Most indicators point to weak growth. A preliminary reading of HSBCs manufacturing Purchasing Managers Index (PMI) for March decreased to 48.1, putting the recent rebound in doubt. (Chart 2) The official PMI for March is likely to follow suit and end up close to or even below 50. Conditions in manufacturing are weak but not consistent with a hard landing. Leading indicators points to growth below trend. (Chart 3) Export and import data are distorted due to the Lunar New Year but export growth is trending downwards. (Chart 4) The trade balance hit a deficit of 31.5 bn USD in February, the largest single-month deficit on record. (Chart 5) Retail sales are holding up well but industrial production showed the lowest reading since July 2009 in January/February (Chart 6) Total loans picked up slightly in February. (Chart 7) The gradual cooling of the housing market continues; house prices were flat in February compared to a year ago. (Chart 8) Construction activity is still strong but project starts are weak. The government is not ready to relax property market controls yet. The depreciation of the yuan towards the USD has slowed down in 2012. (Chart 9) Premier Wen has stated that the yuan might be close to an equilibrium exchange rate.

MONDAY 26 MARCH 2012 Andreas Johnson SEB Economic Research +46 8 763 80 32 andreas.johnson@seb.se

Key data Percentage change

2010 2011 2012 2013 GDP* Inflation* USD/CNY** 10.4 3.3 6.59 9.3 5.4 6.29 8.7 4.4 6.00 8.9 4.5 5.82

* Percentage change. ** End of period. Source: National Bureau of Statistics of China, Reuters, SEB.

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CHARTS ON THE CHINESE ECONOMY