The Chinese economy displays strong resilience as it continues to grow and exceed expectations. According to statistics released by the National Bureau of Statistics of China, GDP for the first half of this year recorded a year-on-year increase of 9.6 %. On a quarterly basis, GDP rose by 9.5% percent for the second quarter of 2011, above the median estimate of 9.3% in a Bloomberg News survey of 18 economists. Much of the growth was added by secondary industries (up 11.0%) and the tertiary (up 9.2%).
Real Estate continues to rise despite tight monetary policy. Investment in fixed assets kept a high pace of growth, with investment in urban real estate increasing rapidly, recording a year-on-year growth rate of 25.6% in the first half of 2011. Investment in residential buildings saw a staggering growth 36.1 %. This is despite China's monetary policy being tightened consistently over the last nine months.
In our July 7 communication on China, we noted that “China has been trying to engineer a managed slowdown of domestic economic activity, partly in order to combat high inflation, but also to control price developments in the housing market. China’s inflation now stands at a year-on-year rate of 6.4%, significantly above the informal 4% target."
Monetary authorities have increased lending rates by 125 basis points since October 2011, taking the minimum lending rate to 6.56%, while also raising reserve requirements by 450 bps, bringing the Reserve Requirement Ratio to 21.5% for large banks.
Clearly, the tightening of monetary policy has not succeeded in containing the demand and growth momentum, nor in cooling down the economy. Industrial output advanced 15.1 percent in June, the most since May 2010.
The Chinese consumer is particularly buoyant. Retail sales of garments, footwear and cosmetics rose by 23.9 % to June 2011, while Gold and Silver Jewelry increased by 49% in the same period.
British luxury consumer goods retailer, Burberry Plc, said it planned to tap growth in mainland China, where sales of luxury goods are set to rise 25% to 11.5 billion.
Monetary tightening is clearly still benign compared to the previous cycles. In the last tightening cycle, the benchmark lending rate rose to 7.49% as inflation peaked at 8.7%.
Although Broad Money Supply growth has been declining since March this year, it seems to have rebounded, rising by 15.9% in June from 15.1% in May. However, bank lending slowed slightly to 16.9% year-on-year in June from 17.1% in May.
China continues to face some inflationary pressures, with food inflation still quite strong, rising 14.4% in June. Although continued tightening of the magnitude seen in 2008 may be necessary to contain the current rise in inflation, it presents a danger to growth, which is below the average seen in the past 5 years.
Xhanti Payi
Assistant Economist
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