Must-know: Chinese Central Bank keeps interest rates unchanged

Drilling down a bit into the recent China 2Q GDP number, a few things stand out:

  1. The real 7.5% headline rate was in line with expectations, but over the past month, estimates had fallen from 7.8% consensus
  2. First half of year growth was 7.6%, so chatter is starting up discussing possibility of China missing its full year 7.5% estimate (China hasn’t missed a full year GDP estimate in 15 years)
  3. Contribution of gross capital formation rebounded sharply as a percent of GDP (on a sequential and year-over-year basis) to offset net export decline

China GDPEnlarge Graph

Below, we laid out the past ten years of quarterly nominal GDP growth for China, just to have a reference point as to the trends and levels of the historical versus recent GDP prints. In addition, we included the contributors of Chinese GDP in the second table.

List of China’s Quarterly Nominal GDP and Growth (in 100 million of CNY)

Q1

Q2

Q3

Q4

FY Growth %

Year

GDP

Growth %

GDP

Growth %

GDP

Growth %

GDP

Growth %

2013

118,855

9.6

8.0

2012

108,486

11.3

119,549

9.7

125,669

8.5

165,599

9.8

9.8

2011

97,480

18.0

109,009

18.1

115,857

18.5

150,759

17.0

17.8

2010

82,613

18.3

92,265

17.7

97,748

17.6

128,886

17.6

17.8

2009

69,817

5.3

78,387

5.7

83,100

8.6

109,599

13.0

8.6

2008

66,284

21.1

74,194

21.2

76,548

19.4

97,019

13.2

18.1

2007

54,756

20.8

61,243

22.2

64,102

23.5

85,709

24.3

22.9

2006

45,316

15.8

50,113

17.1

51,913

16.0

68,973

18.3

17.0

2005

39,117

17.0

42,795

15.7

44,744

13.1

58,280

16.8

15.7

2004

33,421

15.8

36,985

19.3

39,562

18.2

49,911

17.5

17.7

2003

28,862

13.7

31,007

10.9

33,460

12.6

42,494

14.0

12.9

Source: China NBS Quarterly Data

2012 GDP by industry

CNY was converted using the 6.19 CNY/USD exchange rate as of April 12, 2013.

Industry

2012 GDP Value ($ billions)

% of Total GDP

Industry & Manufacturing

3,229

38.5%

Other

1,427

17.0%

Farming, Forestry, Animal/Fishery

846

10.1%

Wholesale & Retail Trade

812

9.7%

Construction

573

6.8%

Real Estate

469

5.6%

Financial Intermediation

462

5.5%

Transport, Storage & Postal

403

4.8%

Hotel & Catering Services

169

2.0%

Total

8,389

100.0%

Source: National Bureau of Statistics of China

After 15 years of consistent and reliable GDP growth projections, I do not envision the Chinese government is ready to come in below expectations. Because of this, a few things might happen within the next five months:

  • An interest rate cut
  • An accelerated pace of infrastructure project approvals lead to inflation
  • Continued yuan devaluation

The Market Realist Take

The Chinese Central Bank decided in its quarterly policy meeting at the end of September to keep key interest rates unchanged. On July 20, it ended the floor on loan rates, paving the way for the liberalization of interest rates. The authorities also stated that Shanghai’s pilot-free trade zone will allow yuan (RMB) convertibility on a trial basis. By announcing these measures, the government is trying to thwart the buildup of domestic imbalances and improve economic growth.

The government has also loosened its monetary policies by speeding up investment in infrastructure, sustaining spending in public housing, and reducing taxes for small businesses. These “mini stimulus” measures seem to have resulted in modest rebounds in various sectors. The Chinese HSBC purchasing managers’ index, or PMI, was up 50.2% in September from 50.1% in August. The report stated that although output increased, the rate of growth slowed to a fractional pace. A report from the Beijing-based National Bureau of Statistics and Federation of Logistics and Purchasing stated that the non-manufacturing purchasing managers’ index increased to 55.4 in September from 53.9 in August.

However, there are concerns over whether this growth is really sustainable in the long run. Investors need to be cautious, and Japan’s WisdomTree Japan Hedged (DXJ) and the iShares MSCI Japan (EWJ), as well as the USA S&P 500 via the State Street Global Advisors S&P 500 SPDR (SPY) and Blackrock’s S&P 500 Index (IVV), may appear more attractive than China’s iShares FTSE China 25 Index Fund (FXI).