Sunday, August 11, 2013

China data improves

Last week’s China PMI data tantalised with signs of economic stabilisation following the recent run of softer data.  That led to a sense of optimism about the July activity indicators that was not disappointed:  industrial production, exports, imports and fixed asset investment all surprised on the upside.

Export growth recovered to 5.1% y/y in July, up from the -3.1% in the year to June.  It has been difficult to read too much into the export growth numbers recently given the over-reporting of data earlier in the year.  We attributed the weakness in the June data to some of the unwinding of that distortion.  Also July 2012 was a weak period for export (and imports) so this latest result is off a low base.  That said, the data was a pleasant surprise and is consistent with stronger export orders in the latest official PMI data which is, in turn, consistent with the recent improvement in data in Europe, Japan and America.

Imports put in an even more robust recovery in July at 10.9% in y/y, up from -0.7% in June.  This recovery needs to be interpreted with a little more caution.  I think it’s a bit too early to attribute this recovery to recent policy measures to boost domestic demand, so I’ll put a good portion of this bounce down to month-on-month volatility.

Industrial production came in at 9.7% y/y in July, up from 8.9% in June.  As with the trade data, a part of this rebound must be attributed to base effects, but it’s still a damn good number.  Growth in fixed asset investment rose to 20.1% y/y in July, up from19.4 in June with strength coming through in infrastructure, real estate and manufacturing.  The strength in manufacturing was a surprise given the over-capacity in that sector which we think still has further to unwind.  It could be that the recent easing in credit conditions, at least compared to June, may have had some positive impact.  The only disappointment in the data was retail sales with year-on-year growth in real sales falling to 11.3% in July from 11.7% in June.

On the inflation front the annual CPI was unchanged at 2.7% in July.  Food prices blipped higher from 4.9% in June to 5.0% in July while non-food inflation was unchanged at 1.6%.  Annual PPI deflation moderated somewhat from -2.7% in June to -2.3% in July, again partly due to base effects.  Inflation certainly doesn’t preclude more aggressive monetary policy easing, although the better-than-expected activity data means the authorities appear likely to continue with the process of policy tweaks while focussing their efforts on structural and rebalancing reforms.

I’m always careful not to read too much into monthly data, especially in China.  However the fact much of this data is consistent with other data (such as the PMI) and with what is going on in the rest of the world (stronger growth in US, Japan, stability in Europe) I’m taking this as a sign of emerging stability following six months of disappointment and uncertainty on the trajectory of China growth.  I think it’s still a story of offsetting factors in the period ahead.  We expect stronger exports on the back of stronger external demand in the second half of the year, softer (manufacturing) fixed assets investment with retail sales, despite the latest result, sailing somewhere through the middle.