Phat dragon

6 December 2011

a weekly chronicle of the Chinese economy

Phat Dragon is nursing a hard won anxious lethargy having

traversed a number of diverse but collectively inhospitable climes over the past nine days. The air miles drive the lethargy; the increasingly sombre data flow brings anxiety in its wake. One cannot long abide a creeping tide of information whose best historical analogue is mid 2008 without a distinct heightening of ones analytical angst meter. After much consideration, including the requisite pilgrimage, Phat Dragon has decided to salute the Fates and lower his 2012 forecast for real GDP growth to 7%. That compares to the previous position of a little above 8%.
16 14 12 10 8

Chinese GDP & the money supply

%
Sources: Westpac Economics, CEIC

30

GDP (lhs) M2 (rhs)

25

20

The downgrade principally reflects domestic factors, but the

international environment has certainly not helped. The shape of the activity profile remains much the same - weakness in the immediate future and a modest recovery profile emerging in the second half of the year. The key change is that the pulse is expected to be weaker in the three quarters beginning with the one still in progress. A 5%-7% pulse is now embedded in the forecasts for this period, versus 6%-8% previously. Alongside weaker European figures, the arithmetic of patchy Q3s across emerging Asia, plus the requisite markdowns for open economies with an exposure to durables manufacturing, and Phat Dragon would argue that the range of private sector world growth forecasts for 2012 will soon settle within half a percentage point either side of 3%.

15

6 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11

10

Contributions to world growth

7 % 6 5 4 3 2 1 0 -1
Sources: Westpac, IMF.

China Advanced Total

Back on November 24, responding to the weak flash estimate of

the November HSBC PMI, Phat Dragon indicated that he has been of the view that manufacturing was looking increasingly vulnerable ... [W]hat has been missing is that moment of discontinuity that separates a genuine cyclical correction from any other (yawn) soft patch. While this survey does not quite evoke a unidirectional unravelling - if inventories had risen sharply in addition to the decline in output and orders, it might justify that description - it conclusively ends any hope that year-ended GDP growth will retain an 8-handle in the March quarter of 2012. Well, the official November manufacturing PMI, a more reliable survey than the private sector alternative [once seasonally adjusted], saw finished goods inventories rise to their highest reading ever in November. Along with across the board weakness in order books (somehow the private series found steady expansion in new export orders) and a deceleration in output, import weakness, a steep decline in the new orders-to-inventories ratio and a depleting work backlog, the manufacturing sector looks to be under contractionary pressure. The moment of discontinuity has not yet arrived, but the odds of such an unwelcome appearance manifesting in the near term from this enfeebled jumping off point have certainly shortened.

-2 1994 1997 2000 2003 2006 2009 2012

Manufacturing: rising stocks, falling orders

54 52 50 48 46 44 42 40 65 60 55 50 45 40 35

index
Finished goods inventories

index

Sources: CEIC, Markit * Seasonally adjusted by Westpac Economics.

NBS*

Markit

New Orders

Real estate remains extremely vulnerable to an activity correction

in response to the pronounced weakness in turnover of new and off-the-plan properties. Phat Dragon will detail his evolving view on the property market in a forthcoming chronicle: and the likely profile of selective policy easing will have to wait also. For now, let it be sufficient that the most sophisticated on-the-ground pundits see the most likely near term mix being weak activity and a stoic continuation of the existing tight housing policy. In short,
Westpac Institutional Banking Group Economic Research

54 52 50 48 46 44 42 40 65 60 55 50 45 40 35

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

the authorities are attempting to build tightening credibility in an area where the firmly rooted belief in the Wen Put creates moral hazard issues that significantly complicate the policy calculus.

Stats of the week: 26.2 million Chinese have signed up for new
broadband internet subscriptions in the year to October.
economics@westpac.com.au www.westpac.com.au

Bank is a division of Westpac Banking Corporation ABN 33 007 457 141. Information current as at date above. This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs. Westpacs financial services guide can be obtained by calling 132 032, visiting www. westpac.com.au or visiting any Westpac Branch. The information may contain material provided directly by third parties, and while such material is published with permission, Westpac accepts no responsibility for the accuracy or completeness of any such material. Except where contrary to law, Westpac intends by this notice to exclude liability for the information. The information is subject to change without notice and Westpac is under no obligation to update the information or correct any inaccuracy which may become apparent at a later date. Westpac Banking Corporation is registered in England as a branch (branch number BR000106) and is authorised and regulated by The Financial Services Authority. Westpac Europe Limited is a company registered in England (number 05660023) and is authorised and regulated by The Financial Services Authority. If you wish to be removed from our e-mail, fax or mailing list please send an e-mail to economics@westpac.com.au or fax us on +61 2 8254 6934 or write to Westpac Economics at Level 2, 275 Kent Street, Sydney NSW 2000. Please state your full name, telephone/fax number and company details on all correspondence. 2011 Westpac Banking Corporation. Past performance is not a reliable indicator of future performance. The forecasts given in this document are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The ultimate outcomes may differ substantially from these forecasts.