Chinese recovery not clear yet, Capital Economics warns

China’s economic recovery has yet to start and the situation is likely to deteriorate further in the months ahead, according to research by Capital Economics.

The Capital Economics China Activity Proxy (CAP), which attempts to track the Chinese economy without relying on the official GDP figures, suggests that growth slowed to 8% in the opening three months of 2012 – down from the 8.9% seen over 2011’s final quarter.

Two of the CAP’s five components contain encouraging news. Electricity output growth appears to have gained speed at the start of 2012 while the number of passenger journeys have been “holding up well”.

However, the remaining three components – freight volumes, seaport activity and real estate sector performance – show signs of weakness in the Chinese economy.

Freight being transported around China by road, rail, water and air has fallen in the last three months, with an even sharper slowdown in activity being seen at seaports – suggesting almost no growth in trade volumes over the most recent quarter. Growth in the real estate sector has also slowed, although it may have now bottomed out.

“The distortion caused by an unusually early Chinese New Year makes interpreting recent data harder than usual, but the CAP implies that a broad economic recovery has yet to begin,” the reports concludes. “The situation seems more likely to worsen from here than improve.”

Alan Thein, co-manager of Legal & General’s multi-manager fund range, notes that the recent National People’s Congress in China set a lower GDP growth target of 7.5% for 2012, down from the usual 8% and in line with the 7% goal set in the latest five-year plan.

“If history is any guide – and we believe it is here – the new lower growth of rate of 7.5% should not be seen as an outright target but rather the government’s minimum acceptable level of growth,” Thein says.

“That said, and whilst we believe this growth transition will take place over the coming years, we doubt that there will be any major shifts in the current growth model this year, given the desire for stability ahead of the leadership transition later in 2012.”