Indicators send confusing growth signals

Editor's Note: Figures released last week on China's foreign trade, inflation and new credit offered a mixed message about the economy. On the positive side was robust trade data and steady growth of new credit. On the negative side, the lowest CPI figure in nearly five years and continued deflation in the industrial sector underscored tepid demand. These statistics increased the difficulty of giving appropriate prescriptions, especially about whether the government should do more to shore up growth. Several leading analysts and economists give their assessments here.

Goldman Sachs Group Inc, Global Macro Research

Falling consumer-and producer-price inflation will push up real interest rates, if the nominal interest rate does not fall. This is a key reason why the open market operations rate and interbank interest rate have been falling in recent weeks. We expect policy rates to stay low until the end of the year. The likelihood of other policy loosening, such as interest rate and reserve requirement ratio cuts, has risen. But if these moves do occur, they are likely to come in targeted form as opposed to across-the-board cuts.

Wang Tao, head of China Economics Research at UBS Investment Bank

The People's Bank of China has recently relaxed property lending policies and encouraged banks to increase credit support for the property sector, which may feed through to improved market transactions and stronger demand for property loans in October and November.

Nevertheless, we think such policies can mitigate but not reverse the property sector's structural downshift, and we expect a further slowdown in construction in the fourth quarter onwards. That will exert an increasingly negative drag on other industries.

We expect the central bank to maintain a relatively supportive credit environment to defend the nation's GDP growth target. Further relaxation of credit supply through increased base money supply and relaxation of loan quotas could help, though we do not expect reserve requirement ratio cut soon - unless there are persistent, large foreign-exchange outflows.

We also expect a wholesale cut in benchmark lending rates by the end of 2014 or early 2015 at the latest, to help more effectively in lowering borrowing costs and boosting businesses' cash flow. To support monetary policy and credit demand, however, we also expect the government to launch new infrastructure projects and relax property policies further.

Qu Hongbin, chief China economist at HSBC Holdings Plc

Overall, lending and credit growth remained relatively stable in September. This should help support economic activity in the next few months. However, overall demand conditions remain weak, as indicated by falling inflation and slow de-stocking. This means the economy is operating with a lot of spare capacity. We expect policymakers to introduce more easing measures in the coming months.

As we have been noting for a while, non-bank lending credit activity has been contracting. This continued in September. After taking out bond issuance, the so-called shadow banking part of the system did not extend any new credit in September. Tighter regulation is good for reducing financial risks in the long term, but the near-term impact on system-wide credit needs to be offset by stronger bank lending.

Zhu Haibin, chief China economist at JPMorgan Chase &Co

CPI inflation averaged 2.2 percent from a year ago in the first three quarters of 2014, well below the government's full-year target of 3.5 percent. CPI inflation will likely stay modest in the coming months. Our forecast pencils in 2.1 percent for the full year. This provides room for policymakers to focus on growth stabilization and structural reforms in the near term.

The return and deepening of PPI deflation is worrisome. For the overall economy, the industrial pricing environment is closely linked to industrial profits, which in turn have a significant impact on manufacturing investment growth. If the PPI remains subdued going ahead, it would reduce the prospect of a potential near-term recovery in manufacturing fixed-asset investment.

We expect policy rates will stay unchanged and credit growth will remain stable in the coming months. The central bank is reluctant to implement traditional monetary easing, because it is concerned about distortions in the monetary policy transmission mechanism. Instead, a new operational framework may focus on lowering market interest rates; targeted quantitative measures and a shift in credit components to improve direct support from credit to the real sector.

Tang Jianwei, senior economist with Bank of Communications Co Ltd

Although the CPI rise eased to a nearly-five year low of 1.6 percent in September, it generally fell within our expectation. A main reason for the slowdown is eased tail-raising factor.

The trend in the PPI is more worrisome. The drop last month was the 31st consecutive monthly decline, and it was even larger than that of previous two months.

The latest rhetoric of the central bank showed that it remains cautious about "across-the-board easing". Instead, "targeted easing toward selected sectors" will remain the primary method.

Imports grew 7 percent year-on-year, suggesting strong domestic demand that is seemingly at odds with what the CPI indicated.

As the six-year low of industrial output growth in August suggests, domestic demand remains quite weak.

Zhou Jingtong, senior analyst at the Institute of International Finance of Bank of China Ltd

The CPI figure was not a surprise. We expect there will not be a significant pickup in consumer inflation in the remainder of this year and the annual CPI growth will be 2.1 percent.

Unless growth in the fourth quarter slows below 7 percent, across-the-board easing is unlikely to occur. I think as long as the economic growth rate does not dip below 7.1 percent, meaning that the economy is running at a pace faster than the potential growth rate, significant easing is not necessary.

Chang Jian, chief economist at Barclays Plc, Hong Kong

We forecast inflation of 2.8 percent in 2015. Non-food inflation slid in September to 1.3 percent year-on-year, given cheaper fuel costs and continued falls in house prices. House price inflation decreased to 1.6 percent, led by the continued fall in rent levels.

PPI deflation worsened in September, led by further declines in mining prices amid overcapacity reductions and the property market correction. The details show that the drop was broad-based and was led by mining products. Mining product prices fell 6.7 percent year-on-year in September compared with a 4.4 percent decline in August.

The weaker-than-expected inflation figure comes amid signs of stabilization in economic activity, but real sector data are likely to remain on the softer side. We forecast modest 7.5 percent year-on-year growth in industrial production, in line with the consensus, and a 16.3 percent year-on-year increase in year-to-date fixed-asset investment.

The September trade data add more weight to our view that growth will recover sequentially in the fourth quarter. We expect exports will continue to post double-digit growth in the fourth quarter on the back of improving external demand and a favorable base of comparison.

Zhu Min, deputy managing director of the International Monetary Fund

The biggest risk to China's economy remains the adjustment in the property sector, which accounts for a major share of China's GDP growth and has influence on a wide range of industries. Prudent monetary policy is suitable for China at the moment and slower economic growth should be welcomed as it will ensure steadier growth in the future. The IMF has forecast the Chinese economy will grow 7.4 percent this year and 7.1 percent next year.