China reported Thursday a slowdown in second-quarter economic growth, along with an easing in a number of other indicators for June. Showing the nation’s expansion is beginning to cool as Beijing applies the brakes on some sectors and withdraws some accommodative policies. Analysts largely interpreted the news as in line with expectations and Beijing’s goals after a period of rapid expansion fueled by government stimulus and expansive bank lending. The data also will impact monetary and fiscal policy, the slower growth means that policy will be tightened less than had been anticipated.
Second-quarter GDP grew 10.3% over the same period a year earlier, slowing from the 11.9% annual growth recorded in the first quarter, according to the National Bureau of Statistics. The growth was also lower than the 10.5% predicted by economists. The country’s consumer price index increased 2.9% for June, while its producer price index expanded 6.4% from the year-earlier month. Both also fell below economists’ expectations for rises of 3.3% and 6.8% respectively. It is our opinion that the data is consistent with the sense that China is engaging in a ‘soft-landing’. The lower than expected growth and inflation report is in line with Beijing’s policies to slow the economy to avoid over-heating and a subsequent sharp contraction.
Over the weekend Premier Wen Jiabao said that everything is going as planned, the economy is heading in an expected direction an outcome that hasn’t be easy, suggesting that Beijing is happy with the latest data showing a moderate slowdown in growth and inflation. These comments can also be viewed as a signal of policy status quo being sent out, removing the possibility of stimulus in August as some players had speculated. Wen added that domestic demand must continue to grow and foreign demand for Chinese goods must remain stable. The Premier’s mention of stable demand for Chinese products abroad alludes to the recent concern for the direction of Chinese exports. The State Information Center, a national policy research center, predict export growth will ease to about 16.3% during the second half of the year, comparing to June’s 43.9% year-on-year export growth.
Elsewhere, on Monday Chinese government ministries signaled there would be no backtracking from the course of policy tightening in the near future, dashing hopes of some that measures to cool the housing sector would be relaxed. China Banking Regulatory Commission and the state-owned Assets Supervision and Administration Commission reiterated their resolve in pushing ahead with tightening measures and other policies designed to curb speculation. Despite the June data showing Chinese house prices edged lower from the month prior, marking the first month-on-month decline since February 2009. It is our opinion that many analysts are underestimating China’s determination in curbing property prices and speculative property purchases.
On the M&A front, at least four consortiums consisting of Chinese investors have approached AIG about a possible acquisition of its Asia insurance division, AIA Group, according to banking insiders familiar with the situation. The investors reportedly approached AIG and the US Treasury soon after Prudential PLC aborted its acquisition plan in June. It is said that one of the consortiums is led by Shan Weijian, chairman of the Pacific Alliance Group, another consortium is being led by Zhang Songqiao, chairman of the Hong-Kong based CC Land Holdings, who is also a major shareholder in China Strategic Holdings. The third consortium is led by Guo Guangchang, chair of the Shanghai based Fosun Group, a large non-state-owned investment conglomerate. The fourth group consists of Hong Kong and Taiwanese investors.
Turning to banking, many outside China were skeptical during the early stages of state-owned bank reform a few years ago, that is no longer the case. No matter which financial gauge you use the Industrial & Commercial Bank of China (ICBC) comes out on top, not only is it the world’s largest bank by market capitalization and deposits, it also had the highest profits last year. Today, its chairman Jiang Jianqing is often invited to speak a key international meeting on financial regulatory reform. “They’ve begun to listen and attach importance to what Chinese banks have to say” Jiang said in a recent interview with Caixin, “it’s poles apart from a decade ago”.
Finaly, returning to the data release, Chinese steel producers who were already under significant pressure did not like the slowdown in growth. Steel producers have a demand problem and there is little relief in sight, even if prices for iron ore ease, growth is slowing. Last week, Baoshan Iron & Steel – China’s second largest steel mill by output – notified traders that it would cuts its hot and cold rolled-coil steel prices by another 300 yuan a ton for August, a decrease of approximately 5%. The lower price will push cash profit to 699 yuan a ton, about the same level as in the first quarter of 2009, when the company just managed to break even. Rival firms are expected to following with 300-400 yuan price cuts with the price of cold-roll-coil going into a “free fall” according to analysts at Citigroup Global Markets.