The “New Normal”

CHINA - Report 29 Jan 2015 by FAN Gang and Chunyang Wang

Executive Summary

Growth has been slowing, with the 7.4% rise in real GDP in 2014 representing a 0.3 pp dip from 2013. That means growth has run below 8% for three years in a row. Quarterly growth rates were quite flat last year, too.

Some depressive factors are worth noting. First, industrial output slowed sharply: its 8.3% rise in the year to December represented a 1.4 pp fall from 2013, which knocked 0.5% off the GDP growth rate. Second, electricity usage growth plunged, to 3.8%, down 3.7 pps from 2013.

Fixed asset investment excluding agriculture rose 15.7% in the year to December, down 3.9 pps from 2013. Retail sales of consumption goods were up 10.9%, down 0.6 pps.

Exports rose 6.1% y/y, down 1.8 pps, although adjusted actual growth in 2014 should be higher than in 2013. Yuan appreciation, which followed the strengthening of the dollar against other currencies, hit exports in Q4, and we expect this dynamic to continue, considering Europe’s recent QE. Though appreciation will play a negative role, we’re still optimistic about Chinese export performance in 2015.

But imports performed terribly in 2014, rising just 0.4% -- and were especially weak in Q4, when imports actually fell -1.6% y/y. Import weakness was mainly due to weak domestic growth.

Money supply growth hit a new low. At the end of 2014, M2 increased 12.2% y/y, down 1.4 pps from the end of 2013. M1 rose 3.2% y/y, down 6.1 pps. M0 rose 2.9% y/y, down 4.2 pps. M1 and M0 growth were at their lowest rates since 1991. The over-tightened money supply will drag economic growth down further if left unchanged.

People’s Bank of China Governor Xiaochan Zhou announced at the World Economic Forum in Davos that the Central Bank would keep its policy stable. That’s the “new normal,” he said. We interpret this statement in the context of the government’s slogan of “new normal” in making economic structural change, rather than growth, the priority. But with deflation risk, a record low money supply and deteriorated economic statistics, we think monetary policy will probably be loosened, to keep growth from falling further. Moreover, we view a hard landing as impossible, as Prime Minister Keqiang Li himself stated at Davos -- because the Chinese government constrains growth, leaving significant room for policy adjustment if necessary.

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