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1. China Watch Group Economics
Macro Research
Maritza Cabezas
Bottoming out 020 3435618
13 July 2012
China’s growth fell to 7.6% yoy in the second quarter, the slowest in three years, but still in line with the government’s target
of 7.5%. Other data released today, including new bank loans and investment suggest that the second half of the year could
be somewhat more promising. We think that measures taken by authorities are helping to cushion the slowdown. Given the
challenging global environment, we think that additional measures will be taken in the second half of the year to ensure a
rebound. We maintain our latest forecast of 8% GDP growth in 2012.
Slowdown in GDP growth, but better prospects ahead sales grew by 13.7% yoy in June showing that consumption is
China’s growth fell to 7.6% yoy in the second quarter, the still holding steady.
slowest in three years and coming down from 8.1% yoy in the
previous quarter. There are two important reasons for this Policies will not relax yet
slowdown. First, a weaker world economy is having a Some of the bright spots could be attributed to the decisive
significant impact on China’s exports, which in the first half of response of Chinese authorities in the past months, signaling
2012 slowed to 9.2% down from 24% in the first six months of that they are willing to do all it takes to keep GDP growth on
2011. This does not come as a surprise since the eurozone is track with their targets. We expect that authorities will not
one of the most important trading partners for China. On top of unleash a massive stimulus programme as they did in 2008-
this, China has embarked in an economic growth strategy 2009 when the global financial crisis erupted, but public
which intends to favour consumption and become less reliant investment remains the wild card to support growth if more
on investments, while at the same time avoiding an unorderly aggressive stimuls were needed. In fact, Premier Wen Jiabao
unwinding of the property market. This is undoubtedly mentioned this week that the government will look to increase
weighing on China’s economic growth, but the pace of public investment in order to stabilise the economy.
slowdown has been somewhat faster than expected.
Moreover, the Chinese central bank has been quite active with
China GDP growth its monetary policy since May. It began cutting the reserve
% yoy requirement ratio by 50bp as part of the easing policy to
16 support credit and stimulate consumption and it cut interest
14
Q2 2012 rates last week for the second time in less than a month. With
12
7.6%
10 inflation down to just over 2 % in June, which is much lower
8
than the government’s target of 4%, we think that there is still
6
4 room for further monetary easing. Indeed, we even expect
2 more easing in the coming months, which will be concentrated
0
Q1 2004 Q1 2006 Q1 2008 Q1 2010 Q1 2012 on cuts in the RRR (200bp), but should also include cuts in the
lending rate (50bp). There is one constant tenor though in
current policies, There is no relaxing in policies related to the
Source: Thomson Reuters Datastream
property market. Premier Wen Jiabao has indicated on several
occasions that property tightening will continue for the housing
There were some bright spots in the data released today market. We think that this is prudent and the adjustment has
though which suggest that the second half of the year will be been orderly, but it also suggests that in the coming quarters,
somewhat more promising. New bank loans rose markedly in the property market will not be supporting the economy.
June to Rmb 919 billion up from from Rmb 793 billon in May
(the highest since March 2012). However, there has been a All in all, although uncertainties related to the eurozone are still
falling share of medium and long-term loans, which suggest high, we are confident that authorities will not only be able to
that banks are still cautious though. Meanwhile, investment cushion the slowdown but that additional measures will permit
grew by 20.4% last month from 20.1% in May, on the back of a the economy to pickup gradually in the second half of the year
number of measures taken to support the economy and retail and we maintain our forecast of 8% GDP growth in 2012.

2. 2 China Watch - Bottoming out - 13 July 2012
Main economic/financial forecasts
GDP growth (%) 2010 2011 2012e 2013e 3M interbank rate 7/5/2012 7/12/2012 +3M +12M 2012e 2013e
United States 3.0 1.7 2.1 2.2 United States 0.46 0.46 0.3 0.3 0.3 0.3
Eurozone 1.9 1.5 -0.5 0.5 Eurozone 0.64 0.50 0.5 0.6 0.5 0.6
Japan 4.5 -0.7 2.5 1.5 Japan 0.34 0.34 0.3 0.3 0.3 0.3
United Kingdom 1.8 0.8 -0.1 1.4 United Kingdom 0.88 0.84 0.8 0.8 0.8 0.8
China 10.4 9.2 8.0 8.0 Norway 2.28 2.23 2.7 2.9 2.9 2.4
Norway 0.6 1.5 2.7 2.3
World 5.2 3.7 3.2 3.6
Inflation (%) 2010 2011 2012e 2013e 10Y bond yield 7/5/2012 7/12/2012 +3M +12M 2012e 2013e
United States 1.6 3.1 1.7 1.5 United States 1.60 1.48 1.8 2.5 2.2 2.8
Eurozone 1.6 2.7 2.4 1.3 Germany 1.41 1.25 1.7 2.2 2.0 2.4
Japan -0.7 -0.3 0.4 0.6 Japan 0.81 0.77 1.0 1.3 1.1 1.4
United Kingdom 3.3 4.5 2.7 1.8 United Kingdom 1.66 1.53 1.9 2.4 2.2 2.45
China 3.3 5.4 3.5 5.0 Norway 2.01 1.81 4.1 2.4 2.404 2.7
Norway 2.4 1.3 1.3 1.6
World 3.6 4.7 3.8 3.8
Key policy rate 7/12/2012 +3M 2012e 2013e Currencies 7/5/2012 7/12/2012 +3M +12M 2012e 2013e
Federal Reserve 0.25 0.25 0.25 0.25 EUR/USD 1.24 1.22 1.20 1.15 1.20 1.10
European Central Bank 0.75 0.75 0.75 0.75 USD/JPY 79.9 79.3 80 90 84 95
Bank of Japan 0.10 0.10 0.10 0.10 GBP/USD 1.55 1.54 1.52 1.42 1.52 1.33
Bank of England 0.50 0.50 0.50 0.50 EUR/GBP 0.80 0.79 0.79 0.81 0.79 0.83
Bank of Norway 1.50 2.25 1.75 1.50 EUR/NOK 7.48 7.47 7.83 7.75 7.75 7.60
People's Bank of China 6.00 5.75 5.50 5.50 USD/CNY 6.36 6.37 n.a. n.a. 6.10 6.10
Source: Thomson Reuters Datastream, ABN AMRO Group Economics. Please note that 10Y rates refer to benchmark government bond yields rather than swap rates
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