Saturday, April 16, 2011

China slowdown "moderate"

March quarter China GDP came in slightly stronger than expected, but nevertheless marked what is best described as a modest slowdown from the previous quarter.

The economy expanded 9.7% y/y in Q1, down slightly from the 9.8% in Q4. I had expected something closer to 9.5%. The new bit of news is that China is now releasing quarterly data. In quarterly annualised terms (to do things the American way), Q1 growth slowed to an annualised 8.7%, compared with 10% in Q4 2010. Warning: these are the only two data points available, so best not read too much into them.

However, some of the partial activity data ended the quarter stronger in y/y terms, including industrial output, fixed investment and retail sales. There is new seasonally adjusted m/m data for these indicators, but with only two data points, as with GDP, it's difficult to read too much into the data.

To further complicate matters, we also got details on the GDP components. Consumption added 5.9 percentage points to Q1 growth, up from 3.9 points over 2010. If that's sustained, that would be good news for global rebalancing. But that is at odds with retail sales data showing the lowest rate of inflation adjusted sales in over 3 years. Hmmmmm.......

Inflation came in a bit higher than expected at 5.4% for the year to March. The market consensus was for an outcome of 5.2%. Again, food prices are the primary culprit, although non-food inflation also rose.

The good news is that the rate of increase in inflation appears to be slowing. Assuming no further big increases in food prices, expect headline inflation to stay around current levels for a few months before starting to fall as we head into the end of the year.

Finally, China foreign reserves rose to over $US3 trillion for the first time in March. That's despite a trade deficit over the quarter. This is indicative of the level of intervention required for keep the Chinese Yuan (CNY) artificially low.

In summary - we think China is slowing moidestly. I'm still happy with my expectation of 9% GDP growth for calendar 2011. But I still think further interest rate increases are required. And it remains the case that a faster appreciaton in the CNY would be good for China and the global economy.