China to grow 7.4% in 2014 despite weak IIP data: HSBC

A: Certainly, some slowdown has been taking place in China, it is happening on the back of couple of things – (1) Some tightening in liquidity conditions, domestic efforts to reign in some lending that takes place through banking system off balance sheet, there also been tightening to some extent related to some of the lending to mortgages. Some of that is weighing on domestic demand, economic activity.

It has also increased uncertainty domestically about the macro economic outlook which has implications or businesses and consumer’s willingness to spend at the moment.

In addition to that we also have some softness on the external side that have been holding back growth in Chinese economy, we have seen an example recently, in some of the trade data that has been released although they been hardly distorted by some reporting issues last year when it comes to export recedes, there has also been an impact from the Chinese New Year, but there is some softness in economic conditions going into the beginning of 2014.

China still has some ammunition to provide some support to growth. So, if you look at the inflation reading we had out of China more recently remained quite subdued. So, there is some scope on the monetary policy side to keep things somewhat accommodated.

Also, they have announced that they will step up fiscal support, so there will be some impetus to growth from that front coming forward. As we go a bit deep into 2014, maybe head into second half of 2014, we will get little more traction on global growth that could begin to lift external demand and pull up exports in China. So, we are still looking at 7.4 percent growth for 2014 as a whole.

Sumaira: There is some moderation in terms of the economy being implied by the data that we are getting but also there are some expectations that perhaps China’s central bank is also preparing to take some of the strongest action that they have taken since 2012 to loosen monetary policy if the growth slows even further by cutting the amount of cash that banks must keep as reserves. What are the expectations now on how Peoples Bank of China (PBoC) may act going forward?

A: We will have to wait and see a bit for now, there is some scope to ease monetary policy or provide some monetary support if needed but it may not necessarily be something they are going to do just around the corner. They still want to be somewhat cautious about over stimulating the economy, there is still need to some extent to reign in lending credit growth in the economy.

So, that is still something that is cognizant about and at the same time they do not want monetary conditions to tighten too much and therefore, they also have to manage that aspect. They have to walk a fine balance between support and growth and at the same time make sure that credit doesn’t get overextended.

Reema: Last weekend when we got the China export data, it rattled all the global markets. Do you think this set of data, the industrial production as well as retail sales will cause additional turmoil in the European markets or even in the US market as they open today?

A: It has certainly underscored some uncertainties that people have about the strength of Chinese growth, there are lingering uncertainties about emerging markets. To some extent, it is something that would potentially weigh on market as they open in the US and Europe going forward.

China is a big play on the global economic stage, a significant slowdown in China has not only regional implications but it also has global implications. That naturally has broader implication from market outside of the region and could cause some concern. They have some room to support growth to some extent going forward and they would likely to keep growth in mid 7 percent range for 2014.