Thursday, April 15, 2010

Top 5 Graphs: China Grows But Faces Challenges

China just released its quarterly data smorgasboard, showing the nation grew 11.9% year on year in the first quarter of 2010. It also revealed its inflation situation, consumer spending trends, and industrial production activity levels. In this review we analyse each data set in terms of what it means for the outlook for the Chinese economy, we also look at the quarterly figures for Chinese international trade.

1. GDP lifted further by stimulus
The Chinese growth miracle continued into the first quarter of 2010 with 11.9% GDP growth year over year. This compares to an expected 11.7%, and Q4 09 of 10.7%, and much improved compared to Q1 09 6.1%. However the growth is largely artificial - or to be fair most of it is artificial. If you look at the figures coming out in 2007 which were also in the double digits, that growth rate had been gradually built up to. If you look at the chart below you have a significant drop-off and were it not for the massive stimulus you would see growth stagnating and drifting sideways if not downward like most other economies. The trick is, what happens next? what happens when the stimulus is removed - or in other words, how long will it take for the Chinese economy to -really- recover?

2. CPI - China will face heightened inflationary pressure
China's CPI year on year percent change inflation figure came in at 2.4% against 2.7% in Feb, and -1.2% in March 2009. As I've previously pointed out the probable trajectory for Chinese inflation is up. The leading indicator points to a rapid uptick in inflation, and huge lending growth, and huge money supply growth can only support inflationary conditions. What's more the triple effect of markets; commodities, stocks, and most of all real estate have already started pushing up headline inflation. Unless the People's Bank of China adjusts policy soon, or the yuan policy gets changed, it's likely that China will see a marked pick up in average inflation.

3. Retail Sales - Chinese consumers still buying more
Another interesting piece of information in the release was Chinese retail sales - one of the best measures we have of Chinese domestic consumption. Sales in March were 1,132 billion yuan; down 8% from February (likely to be driven primarily by seasonal factors such as Chinese New Year). Year on year the growth rate reduced to 18%. The March 2009 figures were 932 billion yuan (up 14.7% year on year). So what we have overall though is increasing growth in domestic consumption. The overall volume of sales is still growing, but also the rate of growth is returning to pre-crisis levels. But then again; were it not for subsidies e.g. appliance purchases, perhaps volumes would have gone sideways.

4. Industrial Production - Helped by consumption, stimulus, and exports
Chinese industrial production picked up further in March to 18% from February's 13%. Again this is an obvious after effect of massive stimulus spending. But it is also benefiting distinctly from the global inventory cycle and related pick up in international trade. Chinese exports (and imports) have recovered strongly since the bottom, but also - there is the domestic spending aspect to it. As you saw above, Chinese consumers have kept on spending and at increasing rates - so obviously production needs to occur to meet demand. But slicing and dicing it these ways really just shows that it's not all that fundamentally driven yet - so where's the real recovery? (where is the structural recovery?).

5. International Trade - Interesting patterns unfolding
One of the most contentious issues these days is the yuan and China's international trade. The March quarter saw China's lowest surplus in about 4 or 5 years, due to exports recovering slowly, but demand for imports rising (and prices of key imports i.e. commodities, rising). But the long term trajectory of China's trade figures is up, up, up. Where its surplus goes will be determined largely by the global recovery, but also its trade policies and strategies. In the longer term, as a low cost competitor China will eventually lose some market share as production of exports shifts to lower cost developing and emerging markets. So that leaves China with some interesting strategic challenges.

In summary, it's always great to get more data from China. It is after all the world's second largest economy, and most populous nation. The long term growth story for China remains intact, short term issues though they may face; not least of all sustainability (environmentally and otherwise). The trend has been for retail sales to grow, this is good for potential import growth and for those investing in the right consumer products companies. The trend has also been for consistently high economic growth, this is good for the Chinese, and those who trade with them.

In the shorter term, the trend has been for increasing inflation, and massive - massive stimulus spending and policy measures. These aren't necessarily bad things - but they must be kept firmly on the radar. They pose threats and opportunities for the various interest groups and stakeholders (think about this). Also in the short term, trade has taken an interesting - but likely transitory - pattern of reversing into greater import growth than exports. These two issues paired with the Yuan policy make for an interesting mix for this year. Keep watching...

Econ Grapher Analytics
National Statistics Bureau

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