A Mixed Picture from China’s Data Dump, but Still Not Tightening
China released most of its economic indicators for April 2010 yesterday. Growth looked remarkably strong, but the data could be interpreted pretty much however you wanted.
If you were looking for signs of building inflationary pressures and a housing bubble, there was enough evidence to make your case. If you were desperate for signs of a rebalancing toward private demand and away from investment-led growth, the data would let you paint that picture too.
Here’s my initial take, for what it’s worth.
The acceleration of M1, especially in demand deposits, suggests that inflation expectations are solidifying. With deposits earning negative real interest rates for three months now, households drew down some of their savings. This suggests the velocity of money is increasing, as time deposits are shifted into demand accounts.
So far this has yet to show up in the inflation data. The CPI came in slightly above consensus expectations, though right in inline with RGE’s forecast, but it was still relatively mild (2.8% y/y or 0.2% m/m). There are problems with the data series—it tends to understate actual price increases, because it doesn’t capture some private services, for example. Still, the main reason that I can see for inflation staying just below the government’s 3% y/y threshold for tighter monetary conditions is that pork prices continued to fall. They were down 5.6% y/y in April due to an oversupply that was built up after prices skyrocketed in 2008. The government stepped in at the end of the month to prop up prices and prevent a mass slaughter, but mild downward pressure from weak pork prices is likely to persist for a while. Other food categories, like vegetables, reflected the poor winter harvest, and overall food prices were up 5.9% y/y. I expect this will inch above 6% y/y in May, pushing the CPI over 3%, but we’ll keep an eye on the higher-frequency data. (Clients can look for our China Focus toward the start of the month in June for our finalized forecasts.)
Also contributing to inflationary pressures were the bank lending data. New loans came in well above consensus and RGE’s expectations of RMB600 billion in April, but I’m a bit less concerned about this. RMB774 billion in new loans is a lot of money, but the main reason the overall figure came in higher than expected was that short-term loans added RMB189 billion to the total. These will expire around the end of the year, and the medium- and long-term new loans figure (RMB556 billion) was the lowest so far this year. The central bank drained RMB437 billion of liquidity through open-market operations in April, so the net-liquidity addition was not that outrageous, even including what I assume were pretty high capital inflows.
Still, it’s worth repeating the line we’ve been hammering for months now—China’s mildly expansionary stance is not appropriate for the country’s overheating economy. As long as this continues, asset bubbles will build.
We may have seen a temporary peak of the property bubble in April, at least according to the NBS price index, but all that liquidity has to go somewhere. This will continue to fuel over-investment in industries with close connections to local governments (heavy-industry, mostly) and, given the limited investment options within China, it’s probably going to go into equities soon enough. Right now investors seem convinced that the government will limit their downside risk on property, but if a property tax really kicks in next year (when I suspect China will still be behind the curve on its monetary policy due to political concerns) then investors may again have to stash their funds in equities. Unless, of course, property is looking attractive once again after policy turns supportive.
There were some signs of rebalancing in the data: investment and industrial value-added came down slightly, while retail sales picked up. But this picture has to be painted with the most unreliable of the Chinese indicators. FAI is probably the least transparent series; IVA means basically nothing; and retail sales captures some wholesale sales and non-consumption inventory transfers. We expect Chinese consumption will hold up well over the course of the year, while investment growth will gradually slow. So even though this month’s data lines up fairly well with our main scenario, I’m hesitant to draw any conclusions yet.
In regards to the trade data, everything looks to be on-track for our central scenario (exports up 16% for the year, imports up 27%, which implies a slight drag on GDP). The processing trade didn’t come back quite as strongly as we had expected in April, and processing imports were slightly weaker than we had anticipated. This suggests we’re going to see some headwinds on Chinese exports to the advanced economies. Auto imports were still unbelievably high in April (up 240% y/y), but the sales data showed some weakening of demand. Auto imports will have to come down in the coming months, unless there has been some major shift in Chinese preferences toward foreign-made autos that I’m missing. Energy imports were still elevated, and still-high copper imports suggest the construction boom is in full swing, but most commodities saw a bit of moderation in April. Aluminum imports are off sharply from last year, which implies that a large portion of the purchases last year was speculative.
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