Tuesday, March 12, 2013

China activity data softer than expected

China activity data for January-February period was generally softer than expected.  Fixed asset investment and exports were the bright spots however retail sales and industrial production were disappointing.  Inflation spiked higher in February reflecting the Chinese New Year.  We expect it to reduce in the year to March, but we continue to believe that inflation has passed the low point in the cycle and will trend higher over the course of the year.  Recent actions to contain the residential property market will delay a more generalised tightening in conditions (e.g. higher interest rates) until next year.

Exports grew 21.8% in the year to February.  That data can be somewhat volatile so we tend to pay more attention to the 3-month moving average – even then exports are posting 19.8% growth.  Fixed asset investment was also strong, recording an annual increase of 21.2%.  That growth (especially in the residential property market) was supported by healthy liquidity and credit availability at the start of the year.

Retail sales and industrial production were more subdued.  Nominal sales growth slipped to 12.3% in February from 15.2% in December.  Growth in industrial production came off as well, dropping to 9.9% in February from 10.3% in December.  While that’s a disappointing drop it’s not too far removed from the December quarter average growth rate of 10%.

Money and credit growth both slowed from the high levels reached in January.  Growth in M2 slowed to 15.2% in February, down from 15.9% in January.  However, that’s still well in excess of the new 2013 target growth rate of 13%.  Liquidity condition area still relatively loose, although the PBoC started to mop up some excess liquidity via open market operations in February.  New lending fell from RMB 1.07 trillion in January to RMB 620 billion which was lower than the market was expecting.

The on balance weaker-than-expected February data hasn’t changed our view of a continued modest rebound in GDP growth over the course of the year, but it adds emphasis to the “modest”.  Our forward activity indicator is still pointing to annual growth of around 8.5% later this year, although we are unlikely to see much change in the annual growth rate from December 2012 (7.9%) to March 2013 (our forecast 8.0%).

The authorities will continue to keep a close eye on inflation, especially in light of the new 3.5% target for 2013.  As expected the annual inflation rate spiked higher in February to 3.2% as a result of the Chinese New Year holiday.  We expect it to normalise in March (back towards 2%), but we continue to believe that inflation in China has passed the low point in the cycle and will trend higher this year.

In terms of monetary policy the expected path of inflation this year means the PBoC will gradually shift from its easing bias to a more neutral stance.  We think actions taken already to contain the recovery in the housing market will delay a broader tightening in conditions until 2014.  The risk to that view is that inflation heads higher more quickly than we currently anticipate.