Weak activity indicators could prompt the authorities to reconsider shelved conventional monetary tools

Today the government announced a batch of economic activity indicators including industrial production (7.7% y/y), retail sales (11.5% y/y) and fixed asset investment (15.9% y/y YTD). Notably, all the outturns undershot market expectations and slowed from their prints in the previous month, suggesting that the economic downturn continue at the beginning of the fourth quarter. The disappointing October indicators did ring the alarm for the authorities since they have already deployed a number of “targeted” easing measures in September and October to underpin growth, including two rounds of Medium-Term Lending Facility (MLF) and the lift of tightening measures in the property market. To a certain degree, October’s lackluster outturns reflect that the effectiveness of the targeted measures is waning. The authorities should consider reinstating some of shelved conventional tools to revive growth. Nevertheless, we anticipate that the growth rate in 2014 can still remain above 7.0% (BBVA: 7.3%) as the authorities are equipped with ample options of policy stimulus at their disposal. Regarding the growth outlook of 2015, we maintain our growth projection of 7.0% while flag some downside risk. That said, the authorities need to accelerate the structural reforms contained in their blue map of the Third Plenum last November, so as to put growth on a sustainable trajectory and to reduce its dependence on short-term stimulus measures.

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