November activity indicators lag behind the credit performance and “New Normal” is set as 2015 theme in Central Economic Work Conference

Today the government announced a batch of economic activity indicators including industrial production (7.2% y/y), retail sales (11.7% y/y) and fixed asset investment (15.8% y/y YTD). Both industry production and FAI further dropped from their prints in the previous month, suggesting that the economic slow-down has continued in the fourth quarter, although the retail sales signaled some moderate pick-up. Right after the releasing of activity indicators above, the PBOC also released November credit data, among which, aggregate financing and new yuan loans substantially exceeded market consensus and the previous readings. In general, the disappointing activity indicators reflected that the PBoC’s interest rate cuts in November still need time to transmit to the real economy, although its effect has been shown in credit performance beforehand. To stimulate the sluggish economy, the authorities should further deploy conventional tools to revive growth. Thus, we project that the PBoC will cut interest rates by one or two times additionally; meanwhile, at least twice Reserve Required Ratio (RRR) cuts between now and the end of next year are also expected. At the same time, China's leaders and senior officials concluded the three-day Central Economic Work Conference, a crucial meeting aiming to set the tone for macroeconomic policies in 2015. In general, the government stated to keep economic policies steady and adapt to the "New Normal" which means to shift from “quantity and speed” to “quality and efficiency” of the growth. Based on this theme, we expect a lower growth target of 7.0% will be set by the authorities for 2015. For 2014, we anticipate that the growth rate can still remain above 7.0% (BBVA: 7.3%) as the authorities are equipped with ample options of conventional and unconventional monetary policy instruments at their disposal. Regarding the outlook of 2015, we maintain our growth forecast of 7.0%. That said, the authorities will set the structural reforms contained in the Central Economic Work Conference as the priority, so as to put growth on a more efficient and high quality trajectory.

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