China: Breaking Below the 7% GDP Target

Published on October 13, 2015
SGH Insight
"Along with a CPI that is expected to drop from the last 2% reading, a sub-7% GDP will also we believe trigger a cut by the People’s Bank of China in both the RRR (reserve requirement ratio) of 50 basis points, and a cut in interest rates of 25 basis points in the second half of October."
Market Validation
(FT 10/23/15) "European equities are enjoying another buoyant day on the back of today's rate cut from the People's Bank of China and yesterday's European Central Bank meeting, which paved the way for further monetary stimulus as early as December.

The PBoC just cut its reserve requirement ratio by 0.5 percentage points, and the one-year deposit and lending rates by 0.25 percentage points, writes Joel Lewin.

Germany's Dax leapt another 1.2 per cent on the news, and is now up 3.2 per cent on the day. The index has risen 14.6 per cent since it hit an eight-month low at the end of September.

The FTSE 100 climbed another 0.6 per cent after China's rate cut was announced and is now up 1.7 per cent today.

The French CAC 40 also jumped another 1 per cent and is now up 2.9 per cent on the day, having risen for six out of the last sessions."

With policymakers and investors around the globe on alert for any signs that could help shed light on the magnitude of the slowdown in China, all eyes will be glued to the release of Q3 GDP growth numbers and revisions for the first three quarters of 2015 this coming Monday, October 18, by the National Bureau of Statistics.

Lest the political significance of that number be lost, Premier Li Keqiang will personally chair a meeting tomorrow, October 14, to review the estimates that have been submitted to him by China’s various departments and ministries and to analyze the latest economic data.

*** Out of nine departments that submitted estimates to the NBS, seven predict year on year GDP will break below the stated 7% official target, with two of those down at 6.8%, and five at 6.9%. The remaining two still peg Q3 GDP at 7%. Cumulatively, for the first three quarters of 2015, all but one of the nine departments are still clinging to a 7% growth rate. ***

*** Perhaps most to the point, Li’s final decision on whether to “go with” the more optimistic 7% Q3 GDP or, as we believe is likely, sign off on a small miss at 6.9% or 6.8% is seen as a test of credibility in acknowledging what some senior economic officials privately concede is closer to a 6.8% growth rate, and with it send a signal of the readiness to take additional stimulus measures in the fourth quarter, both on the monetary and fiscal side. Of course markets seem to be pegging growth even lower than that. ***

*** A break of 7% will trigger stimulus measures that will likely include, as we first flagged in SGH 9/17/15, “China: Additional Fiscal Stimulus if Needed,” one trillion Yuan in targeted tax breaks that have been proposed by the Finance Ministry to President Xi Jinping. From what we understand the focus of those measures will be to stimulate SOEs (state-owned enterprises) that help create jobs. ***

*** Along with a CPI that is expected to drop from the last 2% reading, a sub-7% GDP will also we believe trigger a cut by the People’s Bank of China in both the RRR (reserve requirement ratio) of 50 basis points, and a cut in interest rates of 25 basis points in the second half of October. In the unlikely event Q3 GDP is released at 7%, the PBOC may well still cut the RRR, but not interest rates. ***

Slowing, but How Much?

In addition to the GDP data there will be plenty of data coming out of China between now and Monday, and these are generally expected to register modest declines, except for an uptick in retail sales, which has generally held up well, as evidenced by the release just yesterday of the results of the October 1-7 national holiday season shopping extravaganza. That data of course will not register in the September release.

CPI, which came in at  2.0% in August, is estimated by economic officials to drop to around 1.8% — which will open the door for further PBoC moves — PPI may slide further from -5.9% to -6.0%, and the growth rate in industrial output may slow from 6.1% to 6.0%.

The trade figures that were released last night were also expected to remain weak, with exports estimated by economic officials to fall from -5.5% to -6.0% year on year and imports seen to plunge even further from -13.8% to -15% year on year. And so while the actual September export reading of -1.1% was slightly better than both public and private sector forecasts, the -17.7% drop in imports was most certainly an unwelcome downside surprise to officials and not just to the markets.

The few bright spots are expected could be urban fixed asset investments, which could stay flat, and of course retail sales, which could nudge higher, from 10.9% in August to 11% in September year on year. That nevertheless would constitute a modest advance, and one which markets we believe are already fully expecting, if not hoping, to see.

On a regional level, fifteen, or nearly half of the thirty one provincial governments reported their Q3 GDP lower than the first half of 2015, five unchanged, and eleven actually higher than H1.

But regional governments have been notorious in the past in at times padding data to suit what they perceive to be Beijing’s targets. And so the slightly more sanguine breakdown on regional growth measures should perhaps be taken with a slight grain of salt in light of the national GDP estimates provided by the nine departments.

Out of those nine departments that provided estimates the only two that pegged Q3 GDP at 7% were the Ministry of Agriculture and the Ministry of Human Resources and Social Security.

The most influential, including the NDRC (National Development and Reform Commission), the Ministry of Finance, the PBoC, and the Ministry of Commerce, were clustered at 6.9%, with two outliers, the Ministry of Industry and Information Technology (MIIT), and the State-owned Assets Supervision and Administration Commission (SASAC), at 6.8%.

 

 

 

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