Rudi's View | Jun 11 2010
By Rudi Filapek-Vandyck, Editor FNArena
It is easy to take this week's Chinese data for exactly the opposite of what they are and that is proof the central government's effort to slow down economic activity is actually working. Seems strange to draw such a conclusion when global risk assets are rallying three days in a row following the leak of some Chinese data prior to their official release, isn't it?
And yet, it is true.
Take Thursday's import and export figures, for example. The reason why global risk aversion took a step back this week is because Chinese export data blew everyone away with a growth figure of no less than 48.5% in May – market consensus was positioned for a mere 32% growth figure.
It is easy to see why this news was as well received as it was: at a time when European governments are tightening belts and the US is unable to create a sufficient number of new jobs, it's a relief to see the Chinese have no problems whatsoever to continue flooding world markets with cheap toys, shoes and other stuff.
In addition, the reported 48% improvement in Chinese imports was equally above market expectations, albeit only mildly so. This number too was important because talk of a downturn in Chinese property markets is keeping global investors edgy and various Chinese indicators had been on the soft side recently.
Insofar that some corners of the global investment community were again contemplating a much stronger slowdown this year. There was talk about a GDP number of 8% or even less for the current quarter. Compared with double digit growth in Q1, this would certainly spook financial markets, not to mention industrial metals and oil.
As it happens, Chinese trade data for May showed imports for copper, crude oil, coal and iron ore have all slowed down, without falling off a cliff. The 48% jump in imports has dispelled any fears about an immediate, sharp slow down in Chinese economic activity.
All this is side one of the story, and the reason why equities and commodities have rallied strongly from depressed levels this week.
On the flipside we find proof after proof after proof that the Chinese economy is slowing down. The good news, on the evidence presented thus far, is that this slowdown seems to be of a gradual nature, contrary to what occurred in late 2008.
Note, for example, the sharply widening gap between exports and imports in May.
Chinese data released on Friday mostly fit into this mould. Industrial production expanded by 16.5% in May. In April IP grew at 17.8%. Fixed asset investment in urban areas rose 25.9% in the January-May period – again, this is slower than the reported 26.1% growth for the January-April period.
Retail sales rose by 18.7%, picking up from April's 18.5% increase, but Chinese retail data also include purchases by various governmental departments.
Also, financial institutions in China extended 639.4 billion yuan worth of new local-currency loans in May, down from 774.0 billion yuan in April. Economists had expected 600 billion yuan in new loans.
What would have spooked international markets, if overall circumstances would have been different, is that Chinese consumer inflation punctured through the 3% in May, printing 3.1% growth on an annual basis.
Within a more positive environment this would have sparked expectations of further tightening, but given the slowdown ahead most economists (including the Chinese) seem to anticipate a return to sub-3% inflation growth in the months ahead.
In other words: it's all good, there's no need for panic as far as the Chinese are concerned.
Somewhat disconcerting was the reading of a 7.1% increase in the May producer price index. Not only was this higher than April's 6.8% PPI rise, it also beat economists' median forecast of a 6.9% rise. Again, slowing momentum is likely to take care of this before it becomes a problem that requires government action.
Finally, the People's Bank of China said in a statement that the broadest measure of money supply, M2, rose 21% at the end of May from a year earlier, in line with market expectations, and slowing slightly from the 21.48% rise at the end of April.
Despite some economists expressing their concerns about Chinese inflation and overheating, it is far more probable that no further actions will follow, including no further tightening and no revaluation of the yuan/renminbi – at least not for the time being.
In the meantime, growth projections for the Chinese economy are falling across the globe, but in a moderate manner. According to the new trend it is anticipated this year's GDP will fall below 10% into the 9%-something, which would imply a GDP number of 8%-something by the final quarter of this year.
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