Tuesday, May 11, 2010

China Economic Outlook: Monthly Data Update

China just released its monthly economic data update; in this article we review some of the numbers on inflation, retail sales, industrial production, lending growth, and money supply. The main themes from the data suggest the economy is still growing strong, and that the outlook is for continued expansion of activity. However given the still stimulatory policy stance, the data adds to a view of increasing inflation, and risks of short-medium term overheating.

1. CPI Inflation
China showed further signs of increasing prices as inflation rose to 2.8% year on year in April vs 2.4% and consensus 2.7%. However much of the increase was related to increased food price inflation, but the overall trend of increasing prices has been flagged by the quarterly inflation expectations index (see the chart below); and lines up with the thinking and observations of most internal and external analysts which suggests the Chinese economy is showing signs of overheating. The near term outlook for inflation will most certainly be for continued rises in the near term, probably breaching the 3% target within a month or two.

2. Retail Sales
Moving on, an indicator of Chinese domestic consumer spending, retail sales, increased a further 18.5% year on year; pulling back slightly from the seasonal peak earlier in the year, but beating consensus 18.2% and previous 18%. Retail sales is an interesting metric to watch in light of the Yuan/global imbalances debate; part of the cause of the global imbalances was under-consumption in China vs over-consumption in the US. So continued growth in this metric may be promising in terms of that relationship - but old habits die hard. The more important point to take is that retail sales are consistently rising, which adds to the long term opportunities for investment in China.

3. Industrial Production
On the flip-side of retail sales, industrial production grew another 17.8 in April, which was below consensus forecasts for 18.5% (and March 18.0%). The slight decline was flagged by the April PMI figures (charted along side industrial production below). It's hard to say that it's a negative at this point given the magnitude it's still at, but it will pay to monitor this metric as stimulus spending gets wound back, and potential tightening steps up - and of course, as the global context adds complications (à la Europe) in terms of export related demand. In a similar vein, urban fixed asset investment continued to boom, rising 26.1% - matching consensus, but slightly below 26.4% in March.

4. Loan Growth
Incredibly topical, given concerns about Chinese overheating, and policy moves already taken to crack down on excessive loan growth, the stats for April will give no comfort for those with concerns of overheating. New loans were up CNY 775 billion, sending new loans year to date above CNY 3.5 trillion (which is high historically, but below the CNY 5 trillion this time last year, spurred on by the government to help stimulate the economy during the global financial crisis). On a year on year basis this puts loan growth at 24% and lifts total loans above CNY 46 trillion. So this is a positive in terms of its stimulatory effect on the economy, but a negative in terms of the inflation/overheating context.

5. Money Supply
In a similar track, money supply - a key monetary metric, and important facet to the inflation picture - saw continued growth in April. On a year on year basis M2 grew 21.5% vs consensus 22.1% and previous 22.5%. So the rate of increase is slowing slightly, but it's still expanding at a reasonably rapid pace. M1 expanded 31.2%, while M0 grew 15.9% even after a slight seasonal pull back. To some extent the pace of growth in China can probably absorb some of the large expansion in the money supply, but there will certainly come a point where its influence will become increasingly inflationary. But as with loan growth - it lines up with comments by officials along the lines of being concerned about inflation, but happy to keep conditions relatively stimulatory to help the cement the recovery, and boost growth.


So the main themes to draw from the data would be, that growth is still strong, activity is still expanding, and that fears about overheating and rising inflation aren't without support. Inflation is rising, and though in the short term some of the drivers are temporary, the medium term outlook is for continued rises in prices.

On consumer spending, the trend is still strongly upwards, reflecting rising wealth and incomes, but is unlikely to herald a shift in savings habits. Meanwhile on the industrial production front, there is potential early signs of slowing - but even so still growing at a strong pace, but one to watch as things unfold.

On the monetary analysis, loan growth is still strong, and money supply is still expanding at a fast rate. The measures announced by the government will likely limit loan growth from rising at the same pace as last year, but both measures are clearly expansionary at this point.

So overall, the outlook is for continued growth in activity, and if things keep up, probably another double digit GDP growth figure in Q2. And the long-term story of economic growth in China stands. But given the still very much stimulatory policy stance (in spite of the reserve requirement increases), the risks of overheating and increasing inflation are certainly rising, and may force the government's hand in policy tightening or alterations sooner rather than later.

1. National Bureau of Statistics www.stats.gov.cn & People's Bank of China www.pbc.gov.cn
2. National Bureau of Statistics www.stats.gov.cn
3. National Bureau of Statistics www.stats.gov.cn & CFLP: www.chinawuliu.com.cn & Markit/HSBC: www.markiteconomics.com
4. People's Bank of China www.pbc.gov.cn
5. People's Bank of China www.pbc.gov.cn

Article Source: http://www.econgrapher.com/11may-chinaupdate.html

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