Economy bottoms out, defying hard-landing conviction

By Tao Dong

Shanghai Daily, November 9, 2012

Tao Dong is a research analyst with Credit Suisse.

The 21st Century Business Herald has reported the four largest banks in China lent out 220 billion yuan (US$35.3 billion) in new loans in October. This surprised us: we note it was reported that the Big Four lent out just 125 billion yuan by October 28, indicating there was rushed lending over the final three days of last month.

We now estimate total bank lending at between 600 and 700 billion yuan for October, better than market consensus. October is usually a light month, after the traditional quarter-end rush lending in September. As such, the initial reports of thin lending volume were in line with our expectation, but the surge in bank credit in the final days looked a little unusual.

Anecdotally, there are some new infrastructure projects getting started, railway related in particular. This is also reflected in the construction activities index in the latest non-manufacturing Purchasing Managers' Index survey. If confirmed, the new lending figure would be added evidence that the economy has bottomed out; that is, the fall has at least come to an end.

Having said that, we are reluctant to become more constructive about any sustainable recovery until we see private investment reengage. Public spending can help shore up growth risks, but is not a substitute for organic investment and can't generate sustainable growth momentum.

In a separate note, Premier Wen Jiabao stated that he felt confident (the nation would) achieve its growth target this year.

Premier Wen made the remark at Asia-Europe Meeting (ASEM) summit at Vientiane, Laos. This is the first time, a senior leader has re-affirmed conviction the economy might actually meet the 7.5 percent GDP growth target set in the beginning of the year.

Judging from recent developments in PMIs, industrial production, infrastructure investment, export orders, housing market transaction and bank lending (including trust lending), we think the Premier's evident optimism is justified.

The Chinese economy probably bottomed in the third quarter of 2012, though rebound momentum may not be strong.

Nevertheless, stabilization itself is no little achievement, in our view, given how bearish the market was during the summer regarding China's slipping into a hard-landing.

The article was adapted from a Credit Suisse research note published on November 7. The opinions expressed are his own.