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1 November 2010 by TPC 0 Comments
The economic recovery in China is alive and well according to the latest PMI report from HSBC.? The index surged to 54.8 from 52.9 in October.? The key points:
- Strong domestic demand drives production higher.
- New export orders rose only modestly.
- Input price inflation the fastest in over two years.
Hongbin Qu, Chief Economist of China Economic Research at HSBC summarized the report:
“Another upbeat reading for the HSBC China Manufacturing PMI suggests the strong growth momentum in domestic demand to warrant around 9% GDP growth in 4Q, despite the still soft increase in new exports orders. The jump in output prices reflects higher input costs amidst strong demand, which also heralds a higher CPI likely to reach its cyclical peak in October.”
This is likely good news for U.S. equities as well.? Although this means little for the macro picture in the U.S. it is important that we continue to see strength in the Chinese economy.? The earnings rebound is increasingly dependent on revenue growth in the Asian economies.? China, obviously, is the strong leg in this growth.
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By Econ Grapher
This week the focus is on China, with the quarterly statistics out this week – as well as a surprise interest rate increase from the PBOC. Among the data we review in this edition is GDP growth, inflation trends, the interest rate decision, retail sales growth, and the continued rise of new lending.
1. China GDP
First up is GDP, China saw growth decelerate slightly to 9.6% year on year in the September quarter (or 10.6% YTD on YTD), down slightly vs the 10.3% growth rate in the June quarter. Some of the deceleration was due to a higher base comparison period, but also impacts from macroeconomic controls put in place by the government. So basically the Chinese economy is still tracking along at a relatively fast pace.
2. China Inflation Outlook
Of course the inflation outlook should also remain elevated. The September inflation figure was 3.6% vs 3.5% in August, and 2.9% in June. The PBOC Future Price Expectations Index was also recently released; rising to 73.2 from 70.3 as inflation expectations remain elevated. Much of the inflation result was driven by food prices. Overall the inflation outlook for China remains high, a simple convergence in the chart below should say that one or the other has to give soon (i.e. either higher inflation or lower expectations), but the fundamentals line up with rising inflation.
3. China Monetary Policy
So it’s not a major surprise then that the PBOC raised interest rates, especially in the back drop of a series of increases in the Required Reserve Ratios for the banks. The People’s Bank of China increased the main policy rate 25bps to 5.56% from 5.31%, as well as increasing the 1-year benchmark deposit rate 25bps to 2.50% from 2.25%, marking the first increase since 2007. The move is a logical response to the rapid growth in lending (more on that later), concerns about asset bubbles and overheating, as well as the usual monetary policy reason of higher inflation.
4. Retail Sales
The consumer spending data shows no tapering off either, with continued strong growth – a positive sign for an economy that is facing the challenge of rebalancing to a domestic demand vs export driven growth. The fastest growing categories were ‘Gold and Silver Jewelry’ (54.9%), ‘Furniture’ (39.6%), and ‘Building and Decoration Materials’ (39%), while the largest categories were ‘Automobile’ (CNY 148 bn), ‘Petroleum and Related Products’ (CNY 93.7bn), and ‘Grain, Oil, Foodstuff, Beverages, Tobacco, and Liquor’ (CNY 70.2 bn). So what does that tell us? Chinese consumers are spending most of their money on cars and driving, and spending on discretionary wealth or status items is rising fast. Which is not overly surprising given the per capita rise in income of 9.7% (driven by an 18.7% increase in income from wages and salaries).
5. New lending
The value of new loans is consistently rising in China, attracting the attention and action from the central bank. And wisely so, as the rapid pace of growth in loans threatens to blow out inflation, and potentially create overheating and asset bubble issues. But cultural and regulatory factors have dictated a relatively lower use of debt (as compared to e.g. the US). So lending growth may well be key factor in rebalancing China’s economy – the key is getting it done sustainably, and avoiding the excesses demonstrated by the US experience.
Summary
So the Chinese economy is still going strong, judging by the data that was released this week. This is heartening given the slowing that we’re seeing in several other key economies e.g. US, Japan… but at the same time the divergence in economic prospects has created tensions.
For China the outlook appears to be for continued strong growth, rising inflation; and accordingly tighter monetary policy conditions (which is good for the sustainability of the economic growth). There are promising signs on the rebalancing process in the consumer spending data (though more needs to be done), but also interesting signs around wealth and income levels.
The key risks for China’s economy remain; inflation and overheating, potential impact from the global economic slowdown, the challenges in reorientating the economy to a domestic demand led strategy from an export led strategy, and policy risk (i.e. tightening too much too fast). Apart from that expect more of the same.
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The content on this site is provided as general information only and should not be taken as investment advice. All site content shall not be construed as a recommendation to buy or sell any security or financial product, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of firms affiliated with the author(s). The opinions of all guest authors or contributors can and will differ from those of Mr. Roche. These opinions do not necessarily represent the opinions or investment decisions of Mr. Roche. The author(s) may or may not have a position in any security referenced herein and may or may not seek to do business with one another or companies mentioned via this website. Any action that you take as a result of information or analysis on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.
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There was an attack by the news today, but history is lost in the shuffle - the Chinese raised rates of interest for the first time since 2007.? This is a very real signal that they are worried about overheating.? Bloomberg:
"China would be wise raise rates" Dariusz Kowalczyk, a senior economist at the base of Hong Kong to agricultural credit, said ahead of the announcement today of today. ""He led the global recovery and still is one of the few emerging Asian Nations who have not begun to reversing steep rate cuts orchestrated during the crisis."
Chinese officials are faced with the risks created by recording 9.59 trillion yuan ($1.4 billion) last year credit
boom fed back from the nation of the world recession.Prices in 70 Chinese cities increased 9.1% in September from a year earlier, according to the Statistical Office.China will accelerate the introduction of a tax of property trial in certain cities and then expand the levy to all
country, the Government has declared September 29 without giving a .the calendar ' State also told to stop commercial banks
provides loans to third and extended home buyers a 30 per cent in the obligation to pay to all purchasers of the first House.
These sorts of actions will certainly put a damper on economic growth in the coming months - a necessary step in container more problems, but also a wind face in the short term.Morgan Stanley has already provided historical manual for a phase of clamping:
Eswar Prasad, senior fellow at the Brookings Institution and Professor at Cornell University provided some excellent insights on the situation:
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