2012 has been a philosophical winner for the China bears out there. When most forecasts for China’s 2012 gross domestic product (GDP) forecasts were being considered, reported GDP for the nation was hovering at 9% year-over-year. While OppenheimerFunds’ Global Debt team consistently expected China’s GDP growth for 2012 to end up in the 7% to 7.5% range, the market has spent the year in disappointment phase: Each data release seemed to point to a never-ending slump in all Chinese economic activity figures. Market consensus has fallen from above 8% expectations earlier this year to reach 7% to 7.5% (!) now. Consequently, unlike other large global stock indices, the Chinese equity markets have slumped.
However, it appears China’s downward momentum is reaching a stopping point. While we don’t expect a significant rebound, we also believe that the bears are not likely to get fed a strong diet of bad news heading into the next few quarters.
China’s recent third quarter GDP report showed growth of 7.4% on the year. But what was more interesting to us was the 7.7% growth on the quarter (up from 7.1% quarter-over-quarter growth for the second quarter). In addition, September data revealed a boost in retail sales (14.2% year-over-year), higher fixed investment growth (20.5% year-over-year)1 and an expansion of exports (9.9% year-over-year) for the month.2 Even though exports to the U.S. and the European Union were mediocre to poor, exports to Asia (specifically to Korea and Taiwan) turned out to be particularly strong, even despite a fall off in trade with Japan likely due to the ongoing political dispute. Finally, HSBC Flash China Manufacturing PMI™ for October, an indicator of health in the Chinese manufacturing sector, rose for the second month in a row, suggesting a moderate recovery in manufacturing (showing up currently as a milder contraction).
Investors could focus on the fact that 7.4% annual growth is the lowest in fourteen quarters; however, I believe it’s important to see that the downward momentum in higher frequency data appears to have reversed. We expect the fourth quarter to turn out similar, or perhaps slightly lower, GDP growth, but stabilize around these levels going forward.
What does this mean for the world economy? First, don’t expect a massive wave of Chinese stimulus in the works. The economy is doing what the leadership in China wants it to. We think both fiscal and monetary policy will remain in easing mode, but both will be mild and deliver gradual results. Second, China will not be a swing player in changing the global growth trajectory as we head into 2013, for better or for worse. Finally,GDPgrowth above 7% is nothing to mock. This is a large country with large needs. This kind of moderate growth will contribute to global commodity demand, export growth, and indeed, China’s own imports of goods made abroad.
- National Bureau of Statistics of China, 9/2012.
- China’s General Administration of Customs, 9/2012.
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These views represent the opinions of OppenheimerFunds, Inc. and are not intended as investment advice or to predict or depict performance of any investment. These views are subject to change based on subsequent developments