It's trendy to be bearish on China, but Nomura is convinced that this fashion won't trend this season. While the cooling of the Chinese economy is undeniable, the bank is confident that the floor has been reached and recovery is on the cards:
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“No doubt the economy slowed further in Q2, many growth indicators look weak – such as the HSBC PMI for June, electricity production and industrial shipments – and there are downside risks to our Q2 GDP growth forecast of 7.8% y-o-y – but there are also positive signs that should not be ignored. Having a mix of negative and some positive data are typical at turning points in the economy, and indeed our conviction remains strong that Q2 is the bottom of the economic downswing.”
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Nomura also argues that the government is as alive to the headwinds as the markets, therefore, policymakers will enact growth-promoting measures, thanks to its arsenal of policy tools. Declining inflation numbers also indicate that there is room for policy easing to try and promote growth – something that Wen Jiabao has already alluded to:
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“Policy easing has indeed picked up as indicated by two interest rate cuts within the past month. Lower inflation creates space for further policy easing ahead. We expect CPI inflation to drop sharply again in July to below 2%. We expect full year 2012 CPI at 2.9%, well below the government's annual target of 4%. Premier Wen‟s speech over the weekend acknowledged downward pressures on growth and emphasized investment as the key to boost domestic demand ... We expect the government to cut the reserve requirement ratio twice over the rest of 2012, with the next cut occurring as early as July. We do not expect further interest rate cuts in 2012. We believe growth will rebound in Q3 and increase to slightly below 9% by Q4.”
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And if you're worried about policy-easing failing to transfer to the real economy, here are some soothing words from Nomura:
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"New bank loans rose from RMB682bn in April to RMB793bn in May, and both we and market consensus now expect new loans to pick up further to about RMB1trn in June. Among the 32 indicators we track in our China economic heat map (Figure 2), 64% showed faster growth in May than April, including electricity and industrial production. There are also signs that the policy easing has started to gain traction through the month of June. For example, the final reading of the MNI China sentiment survey for June (released on 29 June) was better than the June flash estimate (53.21 vs 51.92), which indicates that firms who responded in the past week were more positive."
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The analysts reckon that we aren't going to see the pull-out-all-the-stops approach of 2009. Instead, the government will take a slower approach, easing bit-by-bit in order to gauge economic activity. This stance shouldn't be interpreted as the government sitting idly by: after all, the important Communist Party meeting - and the leadership transition - is nearing, so policymakers can ill-afford any slowdown.