China Watch: Shift To Monetary Easing Should Support Chinese Growth In 2012

The Chinese economy grew +8.9% y/y in 4Q11, down from +9.1% in the prior quarter. Despite the slowdown, the result beat consensus and brought relief to those who worried that growth would have slipped below 8%. Expansion in the fourth quarter was driven by surge in industrial production and retail sales. For full year 2011, GDP growth reached +9.2%, in line with market expectations. The question now comes to how the world's second largest economy would perform in 2012 given external headwinds and domestic slowdown. In our opinion, a soft landing is a likely scenario and the chance of sub-8% growth is quite low as policy easing by the government helps limit the downside risks to growth. We expect GDP will grow by mid-8% in 2012.

Economic growth in China has been moderating since the final quarter of 2010. While the tough external environment has played a part, the tightening monetary policy carried out during the period to curb inflation should have been the key causing deterioration in domestic demand. In late October, Premier Wen indicated a potential easing, signaling a shift from previous tightening stance. In addition to the reduction in RRR in December 5, money and credit data for December unveiled the government has started works to stimulate growth.

Financial conditions in China have loosened considerably. New loans soared to RMB 640.5B in December, compared with consensus of RMB 575B and November's RMB 562B. For 2011 as a whole, new loans of RMB 7.47 trillion were created, in line with PBOC's target of RMB 7.5 trillion but less than RMB 7.95 trillion recorded in 2010. The surge in bank loans probably showed the effects of the RRR cut and the fiscal deposit drawdown. Money supply also improved in December. The broadest measure M2 climbed +13.6% y/y, up from +12.7% in November. The figure beat consensus of +12.9%, driven by the transfer of fiscal deposits to corporate and other deposits towards year end. M1 growth also accelerated modestly to +7.9% y/y, from +7.8% in December. The data signaled that easing has been in progress.

Continuation of monetary easing should help support growth in 2012. Despite PBOC's reiteration of prudent monetary stance, moderation in the inflationary outlook should make policymakers more comfortable to go on with further easing. As the impact of monetary policy would be delayed, the improved liquidity conditions in 4Q11 could help boost growth in 1Q12.