Forget Deflation, China Is Set To Rebound Strongly On Easing And Stimulus
China’s slowdown is more dramatic than previously thought, inflation data revealed on Monday. But, despite CPI falling to a 29-month low, and economists like Nouriel Roubini expecting a hard landing in the near term, there are signs that China will rebound in the second half of the year, Nomura’s global economics team says.
“Current market sentiment on China is too bearish,” explained Nomura’s Zhiwei Zhang. While the world’s second largest economy has shown substantial signs of cooling, Zhang expects the output slowdown to bottom out in Q2, and GDP growth to accelerate into the second half of the year.
CPI data released on Monday showed consumer prices growing only 2.2% year-over-year in June, down from 3% in May. And they will continue to slow, despite sliding to their lowest levels since June 2010, according to Nomura, which expects a print below 2% for July.
Deflation has already reared its ugly face in terms of a negative PPI reading. Producer prices fell 2.1% in June, decelerating further from a 1.4% decline in May. “Lower PPI was driven by both weak domestic demand and lower commodity prices,” explained Zhang, adding that “more disinflationary forces [remain] in the pipeline.”
China’s economic slowdown has spread beyond the domestic economy, and is taking its toll on foreign companies. Lagging demand in China has already put downward pressure on shares in Yum Brands, which derives 40% of its operating profits from China, while McDonald’s revealed contracting same-store sales in their Asia-Pacific unit. Global manufacturers like Caterpillar have acknowledged the slowdown too, while sportswear firms like Nike have suffered from compressing margins in China.
On Monday, noted economist and perma-bear Nouriel Roubini reaffirmed his call for a hard landing in China. He noted a “perfect storm scenario” was playing out, just as he had predicted, with the Eurozone in a deep crisis, the U.S. at stall speed, emerging markets under pressure (led by China, which is en route for a hard landing), and the possibility of war with Iran causing oil prices to spike. Roubini even said it’s worse than in 2008, as the power of policy bullets has been eroded; “now we are running out of rabbits to pull out of the hat” he wrote on Twitter.
Nomura’s Zhang isn’t so sure. The economist noted that slowing inflation creates space for more policy easing, while adding that Chinese policymakers have learnt from previous mistakes. Zhang explained it thus:
Nomura expects GDP to slide to around 7.8% in Q2, and then rebound in the second half of the year, to 8.6% in Q3 and 8.9% in Q4. He expects the People’s Bank of China to cut the reserve ratio twice over the second half of the year (after having delivered two rate cuts over the last two months), and lending to jump past 1 trillion renminbi ($157 billion) in June, up from 793 billion renminbi ($124 billion) in May. Further easing coupled with public investment should help boost industrial production, explained Zhang.
Markets appear to be considering China to be down and out. The iShares China ETF is down more than 18% since peaking in early February, as GDP figures for China have been cut by several economists, including the IMF. But Beijing could surprise markets, with strong intervention and a more gradual, and sustainable, approach, achieving a soft landing despite global market turmoil, at least according to Nomura.
Source/Extract/Excerpts/来源/转贴/摘录: www.forbes.com
Publish date: 10/07/12
China’s slowdown is more dramatic than previously thought, inflation data revealed on Monday. But, despite CPI falling to a 29-month low, and economists like Nouriel Roubini expecting a hard landing in the near term, there are signs that China will rebound in the second half of the year, Nomura’s global economics team says.
“Current market sentiment on China is too bearish,” explained Nomura’s Zhiwei Zhang. While the world’s second largest economy has shown substantial signs of cooling, Zhang expects the output slowdown to bottom out in Q2, and GDP growth to accelerate into the second half of the year.
CPI data released on Monday showed consumer prices growing only 2.2% year-over-year in June, down from 3% in May. And they will continue to slow, despite sliding to their lowest levels since June 2010, according to Nomura, which expects a print below 2% for July.
Deflation has already reared its ugly face in terms of a negative PPI reading. Producer prices fell 2.1% in June, decelerating further from a 1.4% decline in May. “Lower PPI was driven by both weak domestic demand and lower commodity prices,” explained Zhang, adding that “more disinflationary forces [remain] in the pipeline.”
China’s economic slowdown has spread beyond the domestic economy, and is taking its toll on foreign companies. Lagging demand in China has already put downward pressure on shares in Yum Brands, which derives 40% of its operating profits from China, while McDonald’s revealed contracting same-store sales in their Asia-Pacific unit. Global manufacturers like Caterpillar have acknowledged the slowdown too, while sportswear firms like Nike have suffered from compressing margins in China.
On Monday, noted economist and perma-bear Nouriel Roubini reaffirmed his call for a hard landing in China. He noted a “perfect storm scenario” was playing out, just as he had predicted, with the Eurozone in a deep crisis, the U.S. at stall speed, emerging markets under pressure (led by China, which is en route for a hard landing), and the possibility of war with Iran causing oil prices to spike. Roubini even said it’s worse than in 2008, as the power of policy bullets has been eroded; “now we are running out of rabbits to pull out of the hat” he wrote on Twitter.
Nomura’s Zhang isn’t so sure. The economist noted that slowing inflation creates space for more policy easing, while adding that Chinese policymakers have learnt from previous mistakes. Zhang explained it thus:
It takes time for the effects of policy easing to be fully felt, but we continue to expect growth to bottom in Q2 and pick up in Q3. After the global financial crisis in 2008 led to a sharp slowdown in China’s economy, the government loosened policies aggressively in January 2009. […]
Whether the government’s policy response was too weak and too late to avoid an economic slowdown is a question that many investors have recently asked. We believe the government learned a lesson in 2009 and will this time take an incremental approach (i.e., instead of pulling out all the stops and loosening as much as possible, it will likely take gradual action that is contingent on feedback from the economy). But this gradual pace of loosening should not be interpreted as a lack of space to ease should growth slow further.
Nomura expects GDP to slide to around 7.8% in Q2, and then rebound in the second half of the year, to 8.6% in Q3 and 8.9% in Q4. He expects the People’s Bank of China to cut the reserve ratio twice over the second half of the year (after having delivered two rate cuts over the last two months), and lending to jump past 1 trillion renminbi ($157 billion) in June, up from 793 billion renminbi ($124 billion) in May. Further easing coupled with public investment should help boost industrial production, explained Zhang.
Markets appear to be considering China to be down and out. The iShares China ETF is down more than 18% since peaking in early February, as GDP figures for China have been cut by several economists, including the IMF. But Beijing could surprise markets, with strong intervention and a more gradual, and sustainable, approach, achieving a soft landing despite global market turmoil, at least according to Nomura.
Source/Extract/Excerpts/来源/转贴/摘录: www.forbes.com
Publish date: 10/07/12
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