Eco Analysis - More evidence of China in early-cycle expansion

Eco Analysis - More evidence of China in early-cycle expansion ■ Strong fiscal revenue growth China's fiscal revenue growth rebounded further to 21.9%yoy in November from 13.7%yoy in October, the fastest pace since August 2011. More importantly, tax revenues grew 21.1%yoy, compared with 12.5%yoy in the previous month and 9%yoy during the first ten months. Value-added tax, which contributes one-quarter of total tax revenues, recovered quite strongly and grew 16.2%yoy in November (vs. 9.2%yoy in October), consistent with the improving trend in industrial and retail sales. The strength of fiscal revenue is another piece of evidence that the Chinese economy is recovering. However, fiscal spending growth was flat at 6.7%yoy, due to a large base effect. The fiscal balance in November was a deficit of CNY 430bn (60bn less yoy). In order to hit the full-year budget deficit target of CNY 800bn, net spending in December needs to reach CNY1.2tn. It gives a Q4 net fiscal spending equivalent to 7~8% of Q4 nominal GDP. This may look impressive, but such kind of spending spree is actually a yearly tradition. The net fiscal spending in Q4 exceeded 10% of quarterly GDP every year between 2008 and 2011. Hence, the on-budget fiscal spending does not seem to be a significant factor behind the ongoing economic recovery. ■ Stable credit conditions New bank lending came in below expectations for a second month at CNY523bn in November (Con. 550bn, SG 500bn, Previous 505bn), but nonbank credit accelerated further. As a result, total credit growth was largely unchanged at 20%yoy - nearly twice the pace of nominal GDP growth. Hence, overall liquidity conditions remain accommodative. Given the improvement in activity data, the PBoC is unlikely to do more for the moment. If anything, monetary and financial policymakers seem to have directed more of their attention towards the financial risk in the shadow banking system. It is also reported that the authority may set a lending target of CNY8tn for 2013. If that is the case, loan growth will slow to less than 13% from 15% at the moment. If the government intends to accelerate infrastructure investment at the same time, nonbank credit will have to maintain the current momentum or there will be liquidity tensions. ■ Lagged employment The quarterly Manpower Employment Outlook survey is one of the few data on China's labour market that we pay close attention to. The survey asks 4,340 employers in China across various sectors about their hiring intentions for the following quarter. The headline result - net employment outlook - is the percentage of employers who plan to increase hiring minus the percentage of employers who plan to decrease employment. There are other two options for employers to choose, “no change” and “don't know”. The latest reading for Q1 2013 declined to 14% from 16% in the previous survey, but was still well above the single-digit readings throughout 2009. Looking at the details, we notice the percentage of employers who plan to increase hiring dropped by 2ppt and there was no change in the categories of either “decrease” or “no change”. Employers who are uncertain rose to 38% of the total sample - the highest in two years. This pattern seems to be consistent with our observation that a big portion of companies are holding on to workers. Given the experience 2010, they are probably concerned that, if they shed jobs too quickly now, they may have to hire at higher wage later. If companies are more confident in the economic recovery, the labour market is likely to strengthen again early next year. YAO Wei http://sgresearch.com