Trend toward more accommodative Chinese policy still intact
Economic data released by China over the weekend leaves some suggesting that the overheating story may still be intact. But taking a step back from month-on-month volatility reveals that the trend of decelerating economic activity that began in late-2009 continues. However, concerns about the risks of hard landing appear to have moderated.
China’s 13.9% growth in industrial output for August was widely cited as highlighting rapid growth in the economy or evidence that the Chinese economy was "withstanding" the government’s efforts to slow growth. However, put in the context of the broader cycle, the growth in output in August (and 13.7% average over the last 3 months) continues a slowing trend from the nearly 17% and 18% rates seen in the first half and final quarter of 2009 respectively.
Some commentators expressed concern that a 9.3% year-on-year (yoy) rise in Chinese property prices may force policy makers to re-start their policy tightening, after an unofficial pause that began in June. However, putting the report in the context of recent trends, this represents the fourth consecutive month of yoy deceleration in real- estate price rises from April’s 12.8% peak and suggests the policies are having the desired effect.
In addition to property prices, car sales in China continue to show the decelerating trend we have been expecting. Retail sales, typically the last sector to turn in the economic cycle, have also now begun to show the same slowing trend as property prices and car sales. Indeed, we expect the retail sales deceleration to intensify into early 2011.
While we are encouraged that the economic data continues to suggest moderation, this weekend’s CPI report remains a key obstacle to an outright easing in the coming months. Though we are encouraged by the deceleration of non-food inflation (from 1.6% to 1.5%), the acceleration in food inflation to 7.5% (from 6.8%) remains troublesome. Indeed, turns in Chinese reserve requirements tend to correlate well with inflections in Chinese food inflation. This suggests that outright easing may be on hold until food inflation pressures abate.
Summary
On balance, the data over the weekend continues to support our expectation of a slowing in the Chinese economy extending into late-2010 and early-2011. We believe this should allow policy-makers to follow the current pause in tightening with a shift towards a more accommodative policy stance early next year.
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