China determined to survive trade setback

Retail sales pad slowdown in merchandise exports and growth is likely to remain in the 15-17% range in the coming months.

As the EU market contributed -3.0% to China's on-year growth, the country relies on retail, fixed assets investment, and a monetary policy geared towards long term structural objectives to keep it resilient.

Here's more from the DBS Group Research:

Economic data for March will be out this week. Exports and imports are projected to grow 7.5% YoY and 8.3% in March, versus 6.9% and 7.7% for the first two months of this year. The resultant trade deficit would be USD 1.4bn, rounding up a deficit of USD 5.6bn for 1Q12, slightly more than the USD 2.2bn deficit from 1Q11, reflecting the general economic weakness of the country’s major trading partners, particularly the EU. For the first two months of this year, the EU market contributed -3.0% to on-year growth, compared to 29.1% contribution from the US. The negative spillover from trade is also evident from the downtrend witnessed from industrial production, which plunged from a peak of 14.9% on average in 1Q11 to 12.8% in 4Q11 and an estimated 11.3% in March 2012. In short, the external environment facing the manufacturing industries is still very difficult.

Under the shadow of ongoing monetary tightness, fixed assets investment would likely have grown 21.2% YTD in March, down from 21.5% in February. While investment will no longer be spearheaded by real estate, non-real estate industries which represent 70% of total FAI growth will continue to charge ahead. Meanwhile, retail sales are expected to come in at 16.0% in March, which still compare favorably with an average of 17.1% in 2011. A decade-long time series show that retail sales tend to be more resilient against external shocks than merchandise exports. Growth is likely to remain steady in the 15-17% range in the coming months.

On the inflation front, the CPI is projected to come in at 3.6%, after falling notably to 3.2% in February from 4.5% in January due primarily to Chinese Lunar New Year base distortions. Relatively low CPI readings for two consecutive months may ramp up market expectation of more monetary loosening. Nevertheless, the orientation of monetary policy going forward will be geared towards meeting longer term structural objectives as opposed to generating short term growth catalysts. This can be implied from China’s reticence to aggressively loosen monetary policy in spite of export slowdown. Not even one single interest rate cut is seen so far in China compared to preemptive rate cuts in neighboring countries. So far, only the reserve requirement ratio (RRR) was cut by 50bps each in 4Q11 and 1Q12 respectively. The pace of cuts will be measured compared to previous cycles, when RRR have been cut by as much as 189 bps within three months back in 4Q08. We pencil in one 50bps RRR cut in each of 2Q12 and 3Q12 respectively, and China is set to grow 8.3% in 1Q12.

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