The weakness in China activity data is proving to be disappointingly stubborn. As his been the practice of the last few months, the monthly data dump of partial activity data surprised on the downside. Industrial production, retail sales, investment, exports and new loans all printed weaker than expected.
While the monthly increase in new loans came in below expectation, we prefer to watch the annual percent change which is nudging slowly higher, suggesting at least a stabilisation of new lending. It is in the loans data that we would expect to see earliest signs of a recovery in activity given that most of the easing to date has centred on the bank reserve ratio.
The biggest disappointment was export growth which came in at 1% for the year to July, significantly undershooting market expectations of 9% growth. Recession in Europe and slow growth in America are taking their toll on Chinese exports.
The good news in the data was the further decline in inflation in the year to July. CPI inflation is now at 1.8% for the year to July. While the bottom of the cycle is approaching (August?), inflation is still likely to come in well below the official target of 4% for the year. That provides ample room for further easing in monetary policy with further reductions in both the bank reserve ratio and interest rates likely in the period ahead. One caveat to that is the authorities will be conscious of not reigniting a property bubble. If it wasn’t for that concern, they would have already eased more by now.