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.