China releases an array of key economic data simultaneously each month. This typically includes monthly data on industrial production, retail sales and fixed investment spending. They also usually release the monthly consumer inflation data at the same time, and when appropriate, the quarterly GDP estimate. Below is a brief summary of the key economic data for this month. Hopefully the charts attached will provide further insight.
China GDP growth slowed to 10.3%y/y in Q2 2010. This was slightly below market expectations for growth to slow to 10.5%y/y and compares with growth of 11.9%y/y recorded in Q1 2010. The slowdown in economic performance links closely with the slowdown in credit growth as well as curbs on housing activity. Credit growth in China has now slowed from well over 30% at the end of 2009 to 18.2%y/y currently (June 2010). The central bank has previously indicated that they target a credit growth rate of 18%. The slowdown in credit growth has been partially offset by the spectacular rise in exports. Export growth was recently recorded at 41%y/y (June 2010), although there is some concern about a slowdown in Chinese exports into Europe in the second half of 2010. Interestingly, since the recent partial relaxation of the movement of the Yuan, which was almost a month ago (21 June 2010) the currency has strengthened by a mere 0.8%.
The growth in industrial production continued to subside and was recorded at 13.7%y/y in June 2010, down from 16.5%y/y in May and a recent peak of well over 18%y/y. The June reading is the lowest growth rate since August 2009. The slowdown in production is consistent with the recent slowing trend in the PMI index and is closely linked to the curtailment of credit extension as well as housing development. The authorities would probably not be comfortable with industrial production falling significantly further.
Retail spending maintained robust growth of 18.3%y/y in June, which is slightly below the 18.7%y/y recorded in May. Retail spending in China was purposely boosted by tax breaks and subsidies on home appliances and cars. China’s auto sales rose by 37.1%y/y in the first six months of 2010, while furniture sales were up 38.5%y/y and home appliance sales 28.8%y/y.
Encouragingly, consumer inflation in China eased to 2.9%y/y in June from 3.1%y/y in May. The market was expecting inflation to rise to 3.3%y/y. (The Chinese government has a notional 3% target ceiling for inflation). The main reason for the slowdown in inflation was a larger than expected fall-off in transport and communication inflation. Food inflation remains relatively high at 5.7%y/y, while housing inflation is at an uncomfortable 5.0%y/y and medical inflation at 3.2%y/y. The rate of growth in property prices has eased fractionally in recent months (see chart attached) and is now growing at 11.2%y/y, down from a peak of 14.1%y/y in April 2010. Strangely, there have been many reports citing concerns about a ‘so-called’ residential property bubble in China. Yet although residential property prices are still rising by over 11%, and recently by over 14%y/y, this growth follows a sharp decline in property prices during 2009. On a net basis, (see chart attached) house prices are currently a mere 0.1% above their peak in January 2008.
Overall, while the Chinese GDP growth rate has slowed, it remains robust by any standard. The authorities boosted domestic economic activity during the global credit crisis, with State Owned Enterprises significantly increasing their credit demand. This included a boost to housing, household furnishings and car sales. There was some risk that these areas of the economy had started to over-heat, and concerns around inflation had risen. The authorities has since endeavored to slow credit growth together with some aspects of domestic demand. Fortunately, exports (which comprise around 25% of the economy) have improved significantly in recent months. From my perspective it would appear that the Chinese authorities are trying to re-balanced the economy to a more appropriate mix that better suits the current global economic environment, and seem to be managing that process reasonably well. Statements about an imminent 'hard-landing' in China, therefore, seem exaggerated.
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