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Goldman Sees China Bounce as History Repeats for Top Analyst

Monday, 11 May 2015 06:42 AM

As gloom gathered over China’s economic outlook in March last year, Goldman Sachs Group Inc. economist Song Yu declared growth likely had “troughed” and a rebound would follow. The top forecaster on China’s economy was proven right, and sees a repeat this year.

“Now it’s very similar to this time of last year in terms of having a combination of monetary, fiscal and administrative loosening,” said Beijing-based Song, ranked the best overall forecaster of China’s economy by Bloomberg Rankings for the past two years. “The data in recent years consistently show us one thing: If the Chinese government really, really wants to push up short-term growth, they can.”

Reflecting that determination, the central bank Sunday announced the third benchmark interest rate cut of the past six months, which combines with two reductions to banks’ reserve ratios and targeted liquidity injections. Song’s sanguine stance is echoed by other economists on the top five forecasters list, who don’t see a hard landing scenario.

The ranking of economic forecasters is based on the last two years of data reported to April 21 and uses estimates submitted to Bloomberg for nine key indicators that include GDP, exports, imports, fixed-asset investment and consumer and producer prices. They commented before the People’s Bank of China’s latest cut, which lowers the benchmark lending rate by 0.25 percentage point to 5.1 percent and the one-year deposit level to 2.25 percent.

‘Mystery Meat’

To conjure their forecasts on the world’s second-biggest economy, the top ranked economists need to deal with official data that Premier Li once said he prefers not to rely on and that prompted bond fund manager Bill Gross to call China “the mystery meat of emerging-market countries.”

Problems with China’s data abound. The National Bureau of Statistics reported a 2014 gross domestic product of $10.2 trillion while the sum of the GDP reported by China’s provinces was $765 billion more. The discrepancy may be due to double counting or by officials inflating figures because their performance is assessed partly on the strength of economic growth.

Secrecy over the weighting of a basket of goods used to measure inflation, the measurement of consumption relying too much on retail sales, and the decentralization of data collection are among flaws cited in a January 2013 paper by the U.S.-China Economic and Security Review Commission on the reliability of China’s data.

Cleaning Data

Unlike counterparts in many developed economies, economists in China need to clean economic data of “dirt, pesticides and all the funny chemicals before we can start cooking with it,” says Song.

At fourth-ranked JPMorgan Chase & Co., Hong Kong-based China economist Grace Ng checks data for exports and imports by digging into numbers provided by trading partners. She drills into electricity consumption numbers, often cited to show economic expansion is slower than published, by examining usage trends in both manufacturing and services, she said.

The next policy move is likely to be a reduction in the amount of cash banks must set aside as reserves, and that probably will be followed by another cut in interest rates, said Goldman’s Song.

“The pace of cutting has not been aggressive enough,” he said on Bloomberg Television Monday. “Until very recently the real interest rate has actually gone up and that’s not helpful.”

Factory-gate deflation has deepened over the past six months, contributing to the highest real borrowing costs for China’s manufacturers since 2009.

External Demand

Song was unfazed by an unexpected drop in April exports and says his optimism over a second-quarter rebound for the economy is buoyed by an anticipated tailwind from external demand. Goldman expects U.S. growth will rebound this quarter in the same way it did in 2014, Song said.

On a quarter-on-quarter annualized basis, gross domestic product growth will pick up to 6.9 percent this quarter, he estimates. Song projects GDP will expand 6.8 percent this year - - near Premier Li Keqiang’s target of about 7 percent -- and full-year growth of 6.7 percent in 2016.

JPMorgan’s Ng also sees a similar trajectory to last year, with policy easing feeding into the economy in coming months as growth in developed markets gathers pace.

Among signs that April data may improve are home sales volume up 18 percent last month from a year earlier in the 29 cities tracked by China Real Estate Information Corp. Some local governments are reporting hefty growth in power use: in Luan of Anhui province, industrial-use power consumption rose 10.4 percent in April from a year earlier.

Stabilization Seen

On the flip side, the final manufacturing PMI reading from HSBC and Markit Economics deteriorated in April.

This year and next will be the bottom for China’s economic growth, with stabilization from 2017, according to fifth-ranked forecaster Zhu Qibing of China Minzu Securities in Beijing.

Paris-based Yao Wei of Societe Generale SA, ranked third by Bloomberg, says the economy is fluctuating around a long-term downward trend and expects growth for the whole year of 6.8 percent. She said forecasting from a different continent can help cut the noise of daily news flow.

“Policy makers understand growth has to come down,” Yao said. “So although they will take measures to avoid a hard landing, at the end of the day they will still let deceleration continue.”

Growth has dipped below the leadership’s 2015 target of about 7 percent, according to Bloomberg’s monthly GDP tracker, which pegs it at 6.35 percent in March. Anticipation of more easing to stem the slowdown has helped stoke a rally in stocks in the past two months.

“I am not as pessimistic as some China bears about growth prospects,” said second-ranked Lian Ping, chief economist at Bank of Communications Co. in Shanghai. “It’s not necessary to revise our forecasts for China’s headline GDP growth in 2015 -- the range between 7 percent and 7.2 percent is still quite possible.”

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As gloom gathered over China's economic outlook in March last year, Goldman Sachs Group Inc. economist Song Yu declared growth likely had "troughed" and a rebound would follow. The top forecaster on China's economy was proven right, and sees a repeat this year. "Now it's...
goldman sachs, china, history, analyst
Monday, 11 May 2015 06:42 AM
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