Beyond calm Chinese GDP numbers, volatility runs deep: BofAML

[HONG KONG] Beneath the stability of China's infamously suspect gross domestic product figures lies a volatility that betrays policy-induced changes, according to economists at Bank of America Merrill Lynch.

Despite oft-touted fears of a hard landing, for the last five years the story told by official GDP figures has been felicitously dull. China grew by 6.7 per cent year-on-year for three quarters in a row in 2016, squarely within the government's goal of a 6.5 per cent to 7 per cent expansion.

But those statistics mask the drivers of growth in the world's second-largest economy, argue Bank of America Merrill Lynch economists Helen Qiao and Sylvia Sheng. A gauge compiled by the bank suggests the nation has had a much more volatile ride, and risks a slowdown in investment demand next year without further stimulus.

"If you look at GDP only, then you would think the Chinese economy is going so smoothly, very much muddling through the doldrums," said Ms Qiao, chief Greater China economist and head of Asia ex-Japan economics research, in a media briefing on Thursday. According to the BofAML China-Aggregate Coincident Tracker, there have been several policy-induced mini-cycles over the last five years that suggest a much less stable path than that visible in headline figures.

Just after the trough of the 2015 mini-cycle, the government boosted spending to shore up growth amid a manufacturing and property slowdown. They also cut taxes on passenger-vehicle purchases by half, to 5 per cent, and rolled out easing measures for the property sector by lowering mortgage-deposit requirements and slashing minimum down payments.

The effect of that stimulus was immediate. Now, "policy makers are largely of the belief that the Chinese economy is doing fairly well and that growth momentum is resilient," said Ms Qiao. That may mean there is "little incentive" for further easing measures.

She termed the latest stage of the mini cycle the "the complacency phase."

Without fresh stimulus, Ms Qiao and Ms Sheng anticipate no pick-up in growth next year, with a 6.6 per cent pace expected versus 6.7 per cent this year.

"Hopefully with more foresight into a potential slowdown led by weaker investment demand, policy makers could adopt counter-cyclical policy adjustments in time to smooth the cycle," concludes Ms Qiao.

BLOOMBERG