China’s Economic Outlook For August
In this report we look at the rise in inflation in the economy of China, followed by continued monitoring of the rise in consumer spending and domestic demand. Then we review the potential rebound in industrial production; looking also at its links with international trade. Finally we note how along with the trends in trade, how loan growth is playing into the dynamics of the global economy and the Chinese economy.
1. China Inflation
China’s inflation rate rose to 3.5%, matching consensus, and up on July’s 3.3% increase. The chart below shows the inflation rate rising in line with the sharp increase in the future prices expectation index, which is currently at 70.3, vs just 11.4 a year ago. The increase is as to be expected given fundamentals, and if past experience is a guide then the picture below is for further inflation to come – which will put pressure on the PBOC in setting interest rates.
2. Chinese Consumers – Retail Sales
The Chinese consumer showed further strength in August, with retail sales rising 18.4% year on year, reaching 9.75 billion yuan year to date. The trend is evidently upward, with the peak period close to spring festival yet to come (Chinese new year is in early February 2011). This chart is always an interesting one to monitor as it provides a good proxy for Chinese consumer spending, or the domestic demand component of China’s economy. It heralds a shift in wealth, economic dynamics, as well as vast opportunities as per capita incomes rise.
3. China Industrial Production and PMI
Industrial production showed a rebound in August as hinted at by the PMI figures released earlier this month; industrial production grew 13.9% year on year, trumping forecasts for 12.9% and previous 13.4%. The rebound in PMI and industrial production is promising for the economy, but it could yet be too early to pick a halt to the decline; but one thing’s for sure, and that’s the recent rebound in trade – which could be triggering a second wave of activity.
4. China Trade Surplus
Indeed, China’s trade figures showed continued strength in exports with exports growing 34.4% year on year to about $139 billion (July $145.5 billion), and imports growing 35% to $119 billion (July $116.8 billion), leaving a trade surplus of $20 billion (slightly down from $28.7 billion in July). The results show the rolling trade surplus picking up firmly, turning around the downward trend. One promising part of the results was that imports were growing faster year on year vs exports – which points to China’s potential to start driving global growth and economic activity. The imports may also point to stronger domestic economy driven demand, as well as inputs for production and re-export.
5. Chinese Banks – New Loans
Finally, China saw a strong expansion in lending in August, with new loans by banks totaling 545.2 billion yuan. Year over year the figure was 134.8 billion stronger than in 2009, and up a strong 18%. The continued expansion of credit shows a contrasting strength in economic prospects as loan growth remains stagnant or even contracts in Europe and the US. But there is the need to remain vigilant about loan quality, and the perennial optimism and insistence of the banks about the triviality of stress tests is not cause for comfort- there is the potential that with such rapid and consistent loan growth that loan quality may have suffered in some cases; so keep an eye on loan impairments and bad debt provisioning.
As a brief summary we saw inflation rise again, but thought about how it could go higher yet. We reviewed the increasingly interesting retail spending data, and its implications for the outlook for domestic demand in the Chinese economy. Then we saw signs of a rebound in industrial production – as heralded by the PMI figures – and thought about how this may link in with the figures we’re seeing in international trade. On the topic of international trade we thought about China’s role in the global economy as it shows somewhat counter-cyclical growth in credit and lending – in contrast to more developed nations. The overall message is one of relatively strong activity in the Chinese economy, with a reasonably positive outlook – economic growth wise; but there are risks for the economy particularly around the aggressive expansion policies and inflation.
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. China Customs www.customs.gov.cn
5. People’s Bank of China www.pbc.gov.cn