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.