International | Nov 16 2006
By Chris Shaw
The Chinese economy this week has reported some mixed signals with retail sales growth accelerating for the third straight month but industrial output falling sharply, raising questions as to whether the economy is set to slow from the record-breaking pace at which it has been running for some time.
Looking at the respective figures, Morgan Stanley was positive on the retail sales growth number as it suggests domestic consumers are now spending more. Evidence of this is categories such as cosmetics, jewellery and autos were among those to post strong increases.
The broker makes the point the number is somewhat misleading as it includes some public and corporate sector data as shown by strength in construction material sales. Overall the trend continues to be positive though, as the year-on-year increase of 14.3% for October is up from 13.9% in September and 13.8% in August.
This suggests the Chinese are making some progress in addressing their economy’s structural imbalances, but the broker makes the point any substantial improvement in this area will take some time so it is best not to get too excited by the figures of the past few months.
At the other end of the spectrum industrial output grew 14.7% year-on-year in October, well below market consensus of a 16% increase. The broker puts much of the outcome down to increased government controls on the availability of money and credit, a view shared by Danske Bank.
In Danske Bank’s view the outcome was inevitable given the government’s attempts to slow down domestic investment, especially when combined with slower global growth. It sees the weakness lasting for at least a few more months, the bank pointing out the full impact of the tighter government controls will take a few months to flow through into the economy as a whole.
Both Morgan Stanley and Danske Bank remain in the soft landing camp in terms of the outlook for China’s economy as a whole, the broker expecting a gradual deceleration in growth as the focus remains on rebalancing the economy away by improving domestic demand at the expense of domestic investment.
Danske Bank points out any slowing in investment growth and in Chinese industry in general is likely to be met by the authorities finishing their tightening cycle, which would all but ensure a gradual slowdown rather than anything more significant.
But with signs emerging the slowdown is underway the bank again highlights its defensive equities strategy with respect to cyclical stocks given it sees potential for further earnings headwinds from a slowing in both China and the global economy.
All this hasn’t stopped analysts at Credit Suisse from expecting further tightening measures by the Chinese government in the short-term. Credit Suisse adds though it expects the Chinese tightening cycle is close to peaking while Beijing seems comfortable with current macro conditions.
Credit Suisse agrees with the soft landing outlook, while believing robust exports and limited rebounds in infrastructure investment should maintain a floor under Chinese industrial production levels in the coming quarters.
