China’s Economy to Pick up in Q4

Weak internal and external demand has slowed down economic growth for the seventh straight quarter

The preliminary accounting data from the National Statistics Bureau shows that China’s Gross Domestic Product (GDP) totaled USD 35.348 trillion during the first three quarters of this year， up 7.7% year-onyear based on comparable prices. The third quarter saw a GDP growth of 7.4%， another decline in seven consecutive quarters.

Slowing economic growth is mainly attributed to the sluggish demand at home and abroad， which is reflected on the three forces driving China’s economic growth —export， consumption and investment. During the first three quarters， China’s export experienced an accumulative growth of 7.4%， 1.8 percentage points lower quarteron-quarter and 15.3 percentage points yearon-year; as for consumption， the domestic total retail sales of consumer goods increased by 14.1%， 0.3 percentage points lower than that in the second quarter and 2.9 percentage points lower year-on-year; in terms of investment， in the past three quarters， the domestic fixed asset investment grew 20.5%， with a slight 0.1 percentage points higher than that of the second quarter yet 4.4% lower year-on-year. Demand from the real economy has also been slashed， which is obviously reflected in industrial production. During the past three quarters， China merely registered a 10% growth in industrial added value， 0.5 percentage points lower than that in the second quarter and 4.2 percentage points lower than that in the same period of last year.

Several factors contribute to the recovering economy

In the third quarter， the economy is still slowing down， but at a much lower speed and the economy begins to stabilize. In addition， a string of economic operating data indicates that there exist several negative factors for the economy to pick up.

First， the leading economic indicators are redounding. In September， although the official PMI 49.8% was still lower than 50%， it saw a month-on-month rise of 0.6 percentage points and it began to pick up after a consecutive downward trend during the past four months. In the same month， the domestic Consumer Confidence Index (CCI) was 100.8%， 1.4 percentage points higher month-onmonth.

Second， industrial production becomes stable after striking the bottom. In September， the industrial added value grew 9.2%， 0.3 percentage points higher than that in August. With an increase of 0.4 percentage points in industrial added value， the eastern regions grew more quickly than the central and western regions. For instance， Guangdong Province experienced a growth of 10.2%， Fujian 16.2% and Shanghai 4.3% from negative growth a month earlier. With a higher degree in both openness and marketization， the eastern regions are more sensitive to economic changes and thus these regions are often than not the forerunner to sense the significant economic transition or turbulence. The climbing industrial production in the eastern regions signals that the total domestic demand is expected to recover.

Third， the consumption-investment-export driving forces of economic growth are gaining momentum again. In September， the domestic consumption ramped up 14.2%， rising 1 percentage point month-on-month; during January and September， the inbound investment registered a total increase of 20.5% with an increase of 0.3 percentage points than that from January to August; September also witnessed an increase of 7.2 percentage points in export to 9.9%.

Fourth， the employment and resident income keeps improving， laying favorable foundation for economic recovery. During the first three quarters， 10.24 million job opportunities were newly created in China’s urban areas， well ahead of the annual objective to newly create 10 million job opportunities. What’s more， the domestic resident income is also experiencing growth with a real hike of 9.8% in the per capita disposable income of China’s urban residents and the cash income for the rural households increased 12.3% in the real sense. The resident income in both the urban areas and the rural areas has experienced a growth well above that of the GDP growth.

Upward total demand in Q4 will drive up economic growth

The future improving global environment will boost China’s export.

The fourth quarter will see an improving global framework. Launching the European permanent relief mechanism ESM will help to ease the European debt crisis and as a result the economy in the euro zone will recover slowly; the US unemployment rate unexpectedly decreased， promising a staggering recovery momentum and its QE3 will keep rejuvenating the economy. The stabilizing external environment， coupled with a series of domestic initiatives to boost global demand will slightly push up the export in the fourth quarter. However， considering that the European debt crisis cannot be solved radically in a short period， the US will still be confronted with a “fiscal cliff”at the end of the year and the external macro environment may improve limitedly within a certain degree， China’s export throughout the year is projected to grow at a rate of less than 10%， to be specific， approximately 8%.

Next year， the global economic situation will become stable. On the one hand， the bond purchasing program launched by the European Central Bank needs the countries concerned to cooperate in terms of policies and measures so as to take effect， and next year the economy may grow slowly in the euro zone; on the other hand， the US will adopt measures to avoid a “fiscal cliff” and its economy will continue to recover moderately; besides， the strained Sino-Japanese island disputes may be somewhat eased. The domestic export only saw a single-digit growth this year， and next year it is expected to pick up.

Pro-growth policies drives up investment and the leadership transition in 2013 may further push up investment

The infrastructure projects approved by the National Development and Reform Commission earlier have begun to kick off， and the booming land market sends signal that property developers are enthusiastic again about investing in the real estate. The total planned investment in the newly-commenced projects has been scaling up in five consecutive months; with stronger capital support， investment in the manufacturing sector will also stabilize due to favorable expectations. And in the fourth quarter， investment in fixed assets will recover with an approximate annual hike of 21%.

Next year， investment may further accelerate. First， the new generation of government leadership team will carry out new investment schemes and measures; second， the polices for advancing urbanization will scale up investments in urban infrastructure; third， investments in manufacturing will pick up as export and the internal economy keep recovering; fourth， greater financial support will be in place， including bank credit and non-bank financing.

Policy stimulus and income distribution system reform will boost consumption in future

In the fourth quarter， the retail sales of consumer goods will be likely to grow at the current rate， and the annual nominal growth rate is projected to reach 14.5% or so. First， during the“two-festivals” holiday (Mid-autumn Festival and National Day)， consumer spending was more vigorous than past years; second， the more housing transactions earlier of this quarter will boost decoration and furniture consumption to some degree; third， the capital market may become active and the recovering wealth effect will build up market confidence and thus encourage residents to spend more.

In 2013， the domestic consumption will grow after stabilizing. First， against the backdrop of a recovering macro economy， a reformed scheme for income distribution is about to be carried out and resident income is expected to grow steadily; second， the package of policies to expand internal demand will help to build up consumption confidence and then to continuously boost consumption; third， a variety of social security measures keeps improving， removing residents’ worries for spending more. However， commodity prices will enter the upward cycle， which may dampen consumption growth to a certain extent.

De-stocking may end up in Q4 and enterprises will usher in restocking

Experience in the past years tells us that the de-stocking process usually lasts for about 15 months. In September， the PMI finished product inventory index continued to drop， while the raw material inventory index picked up. The de-stocking course starting from the end of last year is likely to end up in the fourth quarter. The accelerated approval process for infrastructure projects and expectations on project kick-off have helped to restore confidence in the national economy in the fourth quarter. Expectations on price hike of raw materials under loose global monetary conditions have also made enterprises to consider replenishing inventory. The government leadership transition next year may heat up investment， which will stimulate social production demand and then production prices. Probably， enterprises are expected to launch a new round of re-stocking， but the structural de-stocking with sector features may last.

With greater financial support to the real economy， social financing may scale up moderately in 2013

Since this year， under prudent monetary policy with moderate preadjustments， more financial support goes to the real economy. From January to September of 2012， the social financing scale stood at RMB 11.73 trillion， up by RMB 1.927 trillion year-on-year. In September， in spite of a slight hike in credit loans， the volume of trust loans increased RMB 202.4 billion， nearly RMB 100 billion more than that of the previous month; corporate bond financing also managed to stay above RMB 200 billion. The increase in these two financing categories is mainly contributed by quicker project approval process and recovering investments. Looking forward into the fourth quarter， under a steady monetary policy along with reasonable and moderate aggregate liquidity， the credit loans are expected to increase steadily with a possible increment of around RMB 1.5-1.7 trillion; the picking up demand in investment will push up credit loans in future; during the first half of this year， inadequate effective credit demand led to an over 700 billion of bill financing， a considerable portion of which will convert into substantive loan in the fourth quarter， in particularly medium- and long-term loans for enterprises. This will further ramp up financial support for economic growth. Under such circumstances that the interest rate of bonds issued by enterprises is still lower than the average interest rate for loans， corporate bond financing is expected to keep rapid growth; in the mean time， such financing techniques as trust loans will also keep a staggering momentum for growth. To sum up， the total social financing scale in the fourth quarter is predicted to reach RMB 3-4 trillion and the aggregate social financing scale to above RMB 14 trillion， exceeding the level of last year.

Looking into 2013， although the total credit loans will keep steady growth， with staggering demand in investment， medium- and long-term loans will maintain fast growth and the structure of credit loans will keep improving， both of which will lend greater support from credit loans to the real economy. At the same time， against such a backdrop that the bond market is encouraged to grow， enterprises are expected to be more aggressive to issue bonds and consequently corporate bond financing is likely to usher in rapid development. Moreover， with steady growth in both trust loans and stock financing， the aggregate social financing scale will stay substantial， greatly supporting economic growth. In conclusion， with pro-grow th policies launched earlier， the fourth quarter will see a slight rise of an estimated 7.8% in economic growth， and the GDP throughout the whole year is to increase at around 7.8% in the real sense; in 2013， the economic growth is likely to slightly pick up by 8%-8.5%.