Saturday, December 11, 2010

China Economic Update - 12 Dec 2010

China released its main economic indicators for November over the weekend, following the decision by the People's Bank of China to raise the required reserve ratio another 50bps. This article reviews some of the key data points in the release. We look at inflation, retail sales, industrial production, money supply growth, and new loans.

1. China Inflation
China saw a further spike in inflation in November with the year on year increase in the CPI rising to 5.1% from 4.4% in October. As with October much of the inflation was coming from food prices e.g. "foodstuff" inflation was 11.7% y/y and "non-foodstuff" was 1.9%. The figure came in higher than an expected 4.7% and provides a bit of justification to the PBOC lifting the RRR on Friday, but the question remains; will it need to do more? And how can it address the food price inflation issue? One easy answer could be to let the yuan appreciate and then import cheaper food, but then things are generally never as easy as they seem.

2. Loan Growth
In a similar vein, loan growth came in at 564 billion yuan vs 588 billion in October, pushing the total new loans within inches of the full year quota of 7.5 trillion yuan. So banks will either have to just go over quota - not sure how practical that is, or wait until existing loans are repaid before extending new loans over December. As for next year, in line with the "prudent" monetary policy rhetoric the quota is likely to be a little lower, possibly 6 trillion yuan. But keep watching this space - we all know what excessive loan growth can lead to (i.e. US, et al).

3. Retail Sales
Retail sales grew again around 18 or 19%, but dipped slightly month on month (seasonal) to 1.39 trillion yuan in November. Again one of the fastest growing categories year on year was "Gold and Silver Jewelry" at 67% (totaling 11.5 billion in Nov or 113.7 billion YTD), which is interesting; is it a wealth effect? are lots of people getting married? or are the Chinese searching for stores of value and inflation hedges? Probably the latter. On volume, automobiles and petroleum and related have dominated spending.

4. Industrial Production
Industrial production picked up slightly to 13.3% against 13.1% in Oct. The fastest growing sectors were general purpose machinery (19%), transport equipment (18.1%) nonmetal mineral products (18%), and electrical machinery & equipment (17.4%). So the industrial sector is still cranking away, churning out cars and various other machines and equipment. And given the record exports number in November it's likely that both external, but predominantly internal demand will sustain activity in the medium term (include government in the internal part).

5. Money Supply
Finishing up with money supply, M2 grew at 19.5%, M1 22.1%, M0 16.3%. Basically money supply growth is still carrying on at a relatively elevated pace, and this will put some pressure on inflation (but some money supply growth is needed). It's also worth at this juncture pointing out where some of the key rates are at, the PBOC's policy rate is 5.56% (the bank lifted it 25bps in October), the RRR is 18.50% (from the 20th of Dec), and the government bond rate was 3.96% at the end of Nov (up about 60bps since Sep, having not changed much off an average about 3.40% Jan-Sep). Monetary policy will likely be a hot topic in China in the short-medium term, but let's hope they get inflation under control and achieve a sustainable growth outcome.


It's always a good chance to get a feel for where the Chinese economy is when they release the monthly main economic indicators. Indeed, I always try to expand the range of indicators and data sources when it comes to analyzing China e.g. the Manpower employment survey. But anyway we can takeaway some conclusions from this review of the November data. First of all the rate of inflation is increasing, and it appears to be a tough problem to tackle. Second, loan growth and money supply growth are still going strong, and likely aren't helping the inflation fighting effort. Third, there is still signs of a pretty strong economy e.g. in the retail sales stats and the industrial production stats. So it seems, given relative economic strength that the authorities will have room to maneuver in bringing inflation down - but there is a palpable risk of overdoing things or forcing a slowdown (but then isn't that better than blowing a bubble?).

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

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