Economics Research
China: Assessing the state of the economy

Hard landing risk is gone, but rebound is weak
• There is a visible improvement in the overall liquidity condition, except in the
property sector, compared to three months ago. But regulators are now
restricting lending to local infrastructure projects, causing a slowdown in new
credit.
• Challenges have arisen, however, as the organic demand for loans seems
surprisingly weak. We believe that the constraint on credit has now shifted
from policy quota to demand limitation.
• Despite improved liquidity, there has not been much improvement in growth
momentum. Demand for capital goods and raw materials remained
depressed. Retail sales stayed flattish. Export orders were better than
expected. The risk of a hard landing seems gone, but a sharp rebound in
growth is unlikely.
• Policy makers seemed to be much more confident about their ability to
manage the economy. They are willing to take actions to stimulate the
economy if necessary but think the current pace of growth is within their
expectation and acceptable.
• We do not expect meaningful monetary easing to be launched. RRR is
expected to be cut 1-2 times more, but that is a technical move to neutralize
the de-facto liquidity tightening.
• Inflation is likely to decline towards the 3% level but should start to rebound
later this year, fuelled by wage inflation and price deregulation. Negative real
interest rates may return, and the risk of rate hikes remains. We have revised
our 2012 CPI inflation forecast to 3.7% from 4.4%.
• The property sector has remained the swing factor. We do not believe that
Beijing will ease its housing policy until March 2013. Smaller developers are
likely to face liquidity problems. Mergers and acquisitions are more likely than
a drastic price fall this year, in our view.
• Financial turbulence remains our key concern this year. Risk on local
government debt has declined as banks roll over their loans. Property trust
funds are entering their peak repayment season. Informal lending in China
still looks highly vulnerable to us.