August 13, 2012

China’s July data releases last week show deceleration in key economic indicators such as trade (export growth down to only 1%yoy in July vs. 11% in June, import growth down to 4.7% vs. 6.3%) industrial production (9.2% yoy vs. 9.5%) and retail sales (13.1% yoy vs. 13.7%). YTD fixed asset investment growth was stable at 20.4% yoy. CPI inflation also rose at a slower rate in July, 1.8% yoy vs. June’s 2.2% – the slowest rate since Jan 2010.

July data suggest that the Chinese economy continues to decelerate. DB’s China GDP forecasts for 2012 and 2013 have been revised down to 7.7% and 8.2% respectively. The persistence of the economic slowdown is likely due to the confluence of weak external demand (Chinese exports to Europe declined by 16.4% yoy in July!) and the more “laissez-faire” response of the central government to the current downturn compared with that in 2008-09. The Chinese government has thus far been practising what it preaches, which is to build up the foundation for more consumption-led growth, away from investment-led growth. While monetary easing has been underway for some time – with two interest rate cuts as well as lowering of banks’ reserve requirement ratio – administrative measures and fiscal stimulus have been much more muted than in 2008-09. Calls for stimulus will get louder, but it would be good if the government kept its eye on the long ball and did not engage in indiscriminate stimulus measures likely to create problems later on. We maintain the view that unless signs emerge of systemic risks, such as widespread bankruptcies or a sharp increase in job losses that could threaten social stability, large-scale stimulus measures look unlikely even if GDP growth stays below 8% in Q3.