International | Aug 11 2010
By Rudi Filapek-Vandyck, Editor FNArena
There was a time when new releases of economic data from China would fill the hearts of investors in Australia with a warm, fuzzy feeling. Alas, those times have been firmly relegated to the past. China is slowing down, and every new set of economic data brings more evidence. In addition, the Chinese authorities are clamping down on speculators, on property frenzies and on heavy polluting industries, and the end results are not always clear for foreign observers.
Today's data released in China have simply offered more of the same. To one expert eye, declining producer inflation and lower than expected retail sales point towards an economy that is visibly slowing down, and at likely a faster rate than most would have expected.
To the other expert eye, inflation is roaring back at the consumer level and this might trigger additional action from the central bank. This, in the light of the above, simply cannot be explained as a positive development.
Economists at Westpac, keen China observers at all times, note how industrial production continues surprising to the downside, month after month after month this year. They believe the numbers for the months ahead now appear “vulnerable”, while pointing out the trend is now clearly to the downside.
As far as the Chinese inflation outlook is concerned, the latest insights paint a picture of potentially accelerating consumer inflation with rising food prices more than offsetting weakness for domestic product demand.
Economists at ANZ Bank comment “accelerating inflation, coupled with decelerating economic activities, will require the PBoC to strike a delicate balance when calibrating its monetary operations. While accelerating inflation will necessitate continued monetary tightening, raising reserve requirements further has the potential to exacerbate the already tight credit conditions, especially for small and medium enterprises.”
ANZ is expecting two further interest rate hikes -by 27 basis points each- before year-end.
China's CPI climbed by 3.3% (y/y) in July, up from June’s 2.9% and in line with market expectations. PPI inflation, however, eased sharply to 4.8% in July from June’s 6.4%.
Property pricegrowth, released yesterday, moderated to 10.3% (y/y) in July, compared with June’s 11.4%.
Industrial production continued to slow, but at a measured pace. IP grew 13.4% (y/y), slightly lower than June’s 13.7%. Separately, retail sales gained 17.9% in July, down from June’s 18.3%. (Note that retail sales data are measured when products arrive at warehouses, not when they leave the shops).
Fixed asset investment also moderated. FAI climbed 24.9% (y/y, ytd) in July, down from 25.5% in June, on tighter monetary conditions. M2 growth declined to 17.6% from 18.5% in June.
Economists at ANZ also point out a persistently negative real interest rate suggests that Chinese depositors have been subsidising banks and investors, distorting financial incentives. They thus think the deposit rate could be raised first in order to help realign investment incentives and prevent banks from lending aggressively on a reduced interest rate margin. After that, two rate hikes should follow.
Their colleagues at Westpac zoom in on the fact that thousands of “outdated” factories will be closed throughout the country to help achieve 2010 energy-intensity reduction targets, noting this has encouraged some analysts to wipe a few percentage points off their industrial production forecasts.
Westpac economists don't believe this should be necessarily the case: “One, heavy industry has lots of excess capacity and activities can easily be redirected from “outdated” factories to facilities with more modern equipment. Two, if you planned to jolt the energy intensity figures closer to target, it is more plausible to do so after having taken a highly observable action to justify a dramatic shift in the statistics. Three, factory closures in greater Beijing for the Olympics hammered local output, but they were pervasive and concentrated. These closures are selective and widespread."
Auto sales fell back to a 17.3 million annual rate in July, well off their peak earlier in the year, leading Westpac economists to suggest the unexpected jump in June should prove to be a head fake.
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