Friday, August 13, 2010

Top 5 Graphs of the Week: China July Data

This week we review some of the recent data out of China; first up is a look at the recent slowing in industrial production, followed by signs of slowing in consumer spending. Then we look at the inflation results, which show a potentially short term pick up in inflation. Finally we examine the growth of the money supply and growth in lending; where both measures are slowing due to recent policy moves to install a managed slowdown to counter potential overheating and asset bubbles.

1. Industrial Production
China recorded industrial production year on year growth in July of 13.4%, down from 13.7% in June, and above consensus 13.2%. The movement broadly lines up with the PMI, which tracked downward for the July reading, and saw the HSBC PMI drop below 50 for the first time this year, indicating a possible period of easing of industrial production. But while the short term trend may be down, it is still growing at a strong rate, and if you think about the strength in exports, the recent slow down may start to look increasingly temporary, or on the contrary the slowing of industrial production could end up flowing into lower exports. In thinking about the drivers of industrial production, the next chart may be of interest...

2. Retail Sales
Chinese consumer spending, as proxied by retail sales stats, saw a slight tapering off of the growth rate to 17.9% in July, down from 18.3% in June, and below consensus 18.3%. The stats here are again still relatively strong, but this is an area that the Chinese technocrats should put due attention on; this statistic is the greatest indicator of a potential rebalancing of the Chinese economy to being more domestic-consumption-driven. It is sustained and fundamental strength in this sector that will herald a new phase in China's economic development.

3. Inflation (CPI)
Moving on to a similar topic, inflation; CPI rose 3.3% year on year - in line with expectations, and up from 2.9% in June. Sure much of the result was driven by potentially shorter term food price inflation, but one thing of note on this chart is the PBOC Future Price Expectation Index. This leading indicator of inflation is still at elevated levels, indicating that there maybe latent inflationary pressure that still hasn't come through to the CPI stats yet. But it is interesting to analyse the Chinese situation at present; fiscal stimulus is high and expansionary, but at the same time monetary policy is relatively tight. It is probably this combination that is containing inflation for now. It is also interesting from the perspective that monetary policy could be loosened up if the slow down persists, but on the flip-side, any further tightening could have a disproportionate (negative) effect on economic activity. So this will be one to watch closely as well - but more in terms of monetary policy setting.

4. Money Supply
Keeping with monetary policy and inflation, one potential driver of inflation appears to be easing off; money supply growth. Year on year growth in M2 money slowed to 17.6% in July, from 18.5% in June; similarly M1 slowed to 22.9% from 24.6%, while M0 reduced to 15.5% from 15.6%. The slowing down of money supply growth may end up reinforcing other signs of slowing in activity in China, indeed the notable reduction over the past few months in the rate of expansion could in part explain some of the weakening in other activity indicators. This is likely an intentional policy action by the PBOC, and it may warrant closer monitoring if further signs of a slowing Chinese economy surface. But as explained in the next data point, at least there is room for increased stimulus.

5. Lending
This is a key aspect of China's managed slowdown, with the reduction and stronger enforcement of China's lending quotas for the banks (and the tightening up of lending conditions for property - in line with concerns about potential overheating of the property market), the rate of expansion of new loans has significantly decreased in recent months. New loans registered at CNY 532.8 billion in July, from CNY 603.4 billion in June; bringing the YTD total to CNY 5.16 trillion, vs CNY 7.73 trillion in the comparable period of 2009.


These days the focus on the data coming out of China is the existence of a slowdown; is it really a slowdown? is it just temporary? is it just government created? is it driven by faltering global demand etc. And to think, not long ago, the main concern was about overheating and asset bubbles! So this slowing down or tapering off is probably a good thing; it may allow the Chinese economy to undergo a period of consolidation as the stimulus measures are gradually withdrawn, and the ever so slow process of rebalancing gets underway.

By way of summary, industrial production is expanding at relatively high levels but the rate of expansion has dropped off noticeably in the past few months. Consumer spending likewise is still growing relatively high but tapering off. Inflation is showing signs of picking up, but potentially driven by short term food price inflation. Money supply growth is slowing down to pre-crisis/pre-stimulus levels, and lending growth is being constricted by policy measures designed to prevent asset bubbles and overheating.

So overall there's not too much to worry about for now as China undergoes a period of managed slowdown, but of course there is the risk that the slowdown becomes a route if global activity and trade drops off as rapidly and totally as it did during the height of the crisis; and of course there is policy risk - if the monetary authorities end up doing too much. So let's keep watching this space closely.

1. National Bureau of Statistics & CFLP & Markit/HSBC
2. National Bureau of Statistics
3. National Bureau of Statistics & People's Bank of China
4. People's Bank of China
5. People's Bank of China

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