HSBC Flash PMI data suggests modest recovery is still on track in China, however economist Darius...

HSBC FLASH PMI DATA SUGGESTS MODEST RECOVERY IS STILL ON TRACK IN CHINA, HOWEVER ECONOMIST DARIUSZ KOWALCZYK SAYS THE PACE OF GROWTH IS ABOUT TO PEAK.

SHOWS: HONG KONG, CHINA (DECEMBER 14, 2012) (REUTERS - ACCESS ALL)
DARIUSZ KOWALCZYK, SENIOR ECONOMIST & STRATEGIST, CREDIT AGRICOLE CIB
1.REPORTER OFF CAMERA SAYING:
"Starting with HSBC flash PMI, it hit 50.9, suggesting recovery is still on track. But, I know in your latest report you think that the recovery has already peaked. Why do you say that?"
2. DARIUSZ KOWALCZYK SAYING:
"The PMI index did improve, but remember, it's barely above 50. It's actually quite weak by historical standards. And also, it's not very well correlated with actual manufacturing activity in China. So what we are saying is that yes, the fourth quarter of this year is going to see improved momentum of growth. The first quarter of next year as well. However, we are already in December. The pace of Chinese expansion sequential quarter on quarter GDP growth is peaking either in this quarter or the first quarter of next year, and from then onwards, it will gradually decelerate. So the recovery that we are seeing is not as strong as it was during the Lehman crisis. It's much more gradual because Chinese policymakers are not aiming at double-digit GDP growth anymore. They are content expanding between 7 and 8%."
3.REPORTER OFF CAMERA SAYING:
"So assuming that we are in a gradual mode of recovery here, what do you think needs to be done to ensure that the growth rate of 7.5% can be achieved?"
4. DARIUSZ KOWALCZYK SAYING:
"I don't think that China needs to do anything more. When you look at the data that's incoming right now, momentum is strong enough to allow us to exceed the target in 2012. 7.7% is what we expect the economy to achieve. Next year mostly based on base effects, but the economy will expand by 8.5%. Like I mentioned, the momentum in quarter on quarter terms is peaking at the start of next year or at the end of this year, but on an annual basis next year will be better, will beat the government's target. So there's no need to stimulate the economy further. No need for fiscal stimulus. In fact, we are already seeing slowdown in the growth rate of government expenditures. No need for monetary stimulus. There will be rate hikes next year. Basically the government seems satisfied with what the economy is doing. Tail risks from the housing market, from Europe, from the U.S. they are subsiding. And therefore, I think that policymakers in China can now refocus from supporting growth to restructuring the economy towards domestic demand. And that's the marching order for next year that I think they are adopting."
5.REPORTER OFF CAMERA SAYING:
"What about the yuan? We're seeing a peak even as the central bank did a bit of intervening. Where do you think it's headed?"
6. DARIUSZ KOWALCZYK SAYING:
"Well, it's a currency that has had a relatively good run over the past few months but since the middle of November, gains have kind of petered away and we are now seeing signs of stabilization or perhaps even a small correction. And that's not surprising because the rally in September/October was really strong and we think that towards the end of the year, a little bit more of correction is likely. It will end at 6.27 against the U.S. dollar, but next year will be a better year. Renminbi will appreciate by 2.5% to 6.10 against the U.S. dollar because China will need a stronger currency to fight inflation, rebalance growth towards consumption, and encourage foreign investors to adopt it as a new international currency which is easier to achieve when the asset you are adopting is rising in value."