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China Macro Strategy: Three Upside Risks
Jun Ma and Hui Miao, Deutsche Bank
We raised our 2012 GDP growth forecast from 8.3% to 8.6% on three upside risks to market and our earlier expectations:
1) Exports likely to outperform expectations
We raised our 2012 export growth forecast to 13% from 8%. The upward revision reflects stronger-than-expected demand from G3, a rise in China’s export orders, and improvement in the operating environment for export firms.
2) Small businesses are outperforming expectations
Small businesses, accounting for over 70% of the employment for more than 90% of the firms in the manufacturing sector, have witnessed significant improvement in their operating environment in the past months. Small business PMI rose sharply from 45 in June 2011 to 55.2 in February 2012, the highest reading since the index’s inception. This improvement is supported by falling accounts receivables, lower raw materials inflation, increasing profit margin, and rising export orders.
3) The economy is more insulated from real estate risk than market perception
Our study shows that the economy is much more insulated from the weakness in the real estate industry than the market’s perception. In the current cycle (from January 2010 to February 2012), the correlation between the manufacturing PMI and the real estate PMI was only 0.12, vs. a correlation of 0.81 during the period of July 2008-June 2009. We estimate that the fall in the leading indicator for residential construction (floor space started) by 55ppt in recent months will likely translate into only a 2ppt deceleration in total real gross capital formation for a limited period of time this year Read More
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