Economic Insight - China To Release GDP Next Week

 

U.S. U3 unemployment rate (yellow) & U.S. PCE YoY

Source: Bloomberg

 

 

China may ease the policy further to protect the growth target

Fewer infrastructure development and slowing housing market do not eliminate a shocking number to the south. Its proxy Industrial Production slumped to 6.9% in Aug, and aggregate financing is low in 3Q. Although Trade balance could provide some support, we still expect 7.3% for the 3Q growth results next week.

 

Chinese borrowing costs is poised to drop below the central bank’s savings benchmark for the first time since 2012 as speculation mounts that interest rates will be cut.

 

The one-year swap, a fixed payment to receive the floating seven-day repurchase rate, has fallen 2.13% points so far in 2014 and ended yesterday at 3.09%, near the official 12-month deposit rate of 3%. The last time when contracts were lower than the benchmark was in 2012, when the People’s Bank of China (PBOC) reduced savings and loan costs twice.

 

Asia’s largest economy is forecasted to report third-quarter growth of 7.2% next week, the least since 2009, after data for September showed overall financing missed estimates and inflation eased to the slowest since 2010. While the central bank lowered the rate on the 14-day repurchase agreements this week, a cut in the benchmark is the most direct way to shrink financing costs.

 

China’s benchmark one-year lending rate has been 6% since July 2012, when it was cut for a second time that year. The central bank allowed commercial lenders the freedom to set their own loan costs last year, while the deposit rate remains capped at 1.1 times the PBOC’s 3 % targeted level.

 

Aggregate financing came in at 1.05 trillion yuan last month, missing the 1.15 trillion yuan median estimate in a Bloomberg survey and below last year’s monthly average of 1.44 trillion yuan. Data earlier this week showed consumer prices climbed 1.6% in September, the slowest pace in 4.5 years.

The PBOC cut the interest rate on 14-day repo contracts to 3.4 % this week, compared with 3.5% on October 9 and 3.7% on September 16. The seven-day repurchase rate averaged 3.05% this month, the lowest since May 2012.

 

New yuan loans plunged to the least since 2009 in July as the benchmark money-market rate rebounded to an average 3.84% after exports and manufacturing showed signs of a recovery in the previous month. This time, the central bank may allow funding conditions to remain ample for a while.

 

PBOC Governor Zhou Xiaochuan last weekend reiterated the need for “prudent” monetary policy amid “steady” economic expansion. China prefers reform to economic stimulus, Premier Li Keqiang said last week, while adding that the nation should ensure that its 2014 economic goals are met.

 

While total financing fell short of expectations, it was still up from 957 billion yuan in August. Money supply grew 12.9%, accelerating from 12.8%. The yuan strengthened 0.05% to 6.1231 versus the dollar in Shanghai yesterday.

 

The central bank has so far opted for targeted measures to bolster growth, including RRR cuts for smaller banks and a 500 billion yuan provision for the nation’s five largest banks. Debt ballooned after the government rolled out a stimulus campaign amid the 2008 financial crisis, while shadow banking, which encompasses off-balance-sheet lending including trusts, also expanded beyond policy makers’ direct control.