Wednesday, September 11, 2013

August China data a nice surprise

It was another good month for China data with most indicators exceeding expectations in August.  The recovery in the July data was off the low point in the cycle last year so this round of data was going to be the true test of a genuine recovery in activity.  The better data has certainly been beneficial to the China share market which is now around 20% higher (according to the MSCI China index) than the lows reached in July.

Annual growth in industrial production moved back into double digits at 10.4% in August, up from 9.7% in July.  Retail sales moved higher in both nominal and real terms and fixed asset investment rose in year-to-date terms.  Within the investment result, manufacturing investment managed to post another improvement in its growth rate which was a surprise.  That data followed the earlier release of trade statistics showing an acceleration in export growth to 7.2%, up from 5.1% in July.  As a growth signal only imports were disappointing: the annual rate of growth declined from 10.9% in July to 7.0% in August, although lower imports of course helps net exports in the GDP calculations. But remember we thought the July result was probably overstating the strength.  Finally, new loans growth was also stronger than expected.

This data is consistent with other indicators suggesting improvement in economic activity.  The recent manufacturing PMI results (both the HSBC and official NBS indices) have been positive.  Stronger readings on employment within those surveys also help explain the stronger retail sales.  And recall we have expected stronger exports on the back of stronger growth in the US and Japan and stabilisation in Europe to act as a brake on the recent slowdown in growth.  Indeed annual growth in exports to Europe rose for the second month in a row.

At the same time inflation remains subdued.  Annual inflation dropped back from 2.7% in July to 2.6% in August, the result of a slowing in the annual rate of food prices.  Non-food inflation was unchanged at 1.6%.  While inflation has remained well under control so far and well below the official target of 3.5%, we have seen little scope for interest rate reductions.  That view is reinforced by this round of activity data which, at worst, further reduces downside risks to growth.  Monetary policy action is likely to remain contained to continue to ensure there is sufficient liquidity in the banking system.  I’m still happy with my 7.6% GDP forecast for calendar 2013.