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China's gradual recovery is underway
By Shen Lan |
November 16, 2012, Friday
|
Print Edition
Print Edition
CHINA'S October macroeconomic data assured the market that the country is seeing a gradual recovery. The subdued Consumer Price Index (CPI) reading suggests little cause for concern about inflation pressure in the near term. Electricity generation, heavy industrial production and investment in new projects all picked up last month, pointing to a further gradual pick-up in growth momentum. The real-estate market is showing signs of improvement and is likely to revive in the first half of 2013. We look for a mildly supportive policy stance - characterized by flush liquidity but no interest rate or reserve requirement cuts - for the remainder of this year.
CPI inflation moderated to 1.7 percent year on year in October from 1.9 percent in September. On a month-on-month basis, seasonally adjusted annualised rate (SAAR) basis, we calculate that CPI inflation eased to 2.1 percent from 2.6 percent the previous month.
Little pressure
This suggests little inflation pressure at the moment. Food inflation dropped slightly to 2.7 percent from 3.3 percent (month-on-month SAAR), mainly due to the continued correction in vegetable prices, which offset the mild uptick in pork and rice prices. Non-food inflation remained at around 2 percent. Meanwhile, the contraction in the Producer Price Index (PPI) narrowed to 2.7 percent from 3.6 percent in September, suggesting less upstream deflationary pressure.
We maintain our view that inflation is bottoming out and will gather momentum, though we expect it to remain fairly benign this year. We expect higher year-on-year readings from November due to a reversal of the base effect and a pick-up in food prices. Persistent rises in pork prices, along with utility price reforms, will likely push CPI inflation onto a gradual upward path next year. We expect it to become a major concern in the second half of 2013.
Industrial production growth accelerated to 9.6 percent year on year in October from 9.2 percent in September and the month-on-month growth rate increased by 0.8 percentage point, according to the official data.
This echoes a strong rebound in electricity production data, which picked up to 6.4 percent year on year in October from an unexpectedly low 1.5 percent in September. The recovery in the industrial production reading was mainly driven by heavy industry, where production accelerated to 9.7 percent year on year from 9.3 percent prior, while growth in light industry inched up to 9.1 percent year on year from 9.0 percent. The pick-up in heavy industrial production was more pronounced in the month-on-month growth number, indicating that an increase in investment projects may be around the corner.
Official fixed asset investment growth was 20.7 percent year on year in the first 10 months of the year, translating into marginally higher monthly growth of 22.2 percent year on year in October, the highest reading in 11 months.
By sector, fixed-asset investment in infrastructure maintained robust growth of 25 percent year on year in October, while manufacturing investment grew 20 percent year on year, similar to previous readings. Growth in total planned investments in newly started projects continued to accelerate to 35.2 percent year on year in October from 31.2 percent in September, suggesting that more investment projects will be rolled out in the coming months.
Real sales growth accelerated to 13.5 percent year on year in October from 13.2 percent in September, supported by holiday consumption and solid income growth.
Growth in investment in residential real estate picked up to 13.2 percent year on year in October from 9.9 percent in September. Growth in floor space sold rebounded strongly to 12.2 percent year on year from an average of 8.7 percent in the third quarter, which is encouraging. The decline in area under construction continued to narrow. We believe this indicator could well move back into positive territory in the first quarter of 2013, and make a positive contribution to the economy in the first half of 2013.
Moderate recovery
Overall, the October macro data set is positive for market sentiment and suggests a continuing moderate recovery in China's economy. We believe the monetary policy loosening that started in the second quarter is continuing to have an effect. According to the third-quarter monetary policy report from the People's Bank of China, the weighted average rate of banks' lending dropped to 6.97 percent as of September from 7.6 percent in the first quarter. Fewer loans were priced above the benchmark rate (64 percent in September, compared with 70 percent in March), while around 11 percent of total loans were priced below the benchmark rate, up from only 4.6 percent in March.
We believe China's interest rate-cutting cycle has ended, as the central bank seems to believe that rates are already at an appropriate level, and that a further drop in real lending rates can be achieved via the 30 percent floor of the band.
Given that the economy is stabilizing and showing signs of gradual recovery, we expect a mildly supportive policy stance - characterized by measured and targeted stimulus - for the rest of 2012.
Shen Lan is an economist with Standard Chartered Bank. The opinions are her own.
CPI inflation moderated to 1.7 percent year on year in October from 1.9 percent in September. On a month-on-month basis, seasonally adjusted annualised rate (SAAR) basis, we calculate that CPI inflation eased to 2.1 percent from 2.6 percent the previous month.
Little pressure
This suggests little inflation pressure at the moment. Food inflation dropped slightly to 2.7 percent from 3.3 percent (month-on-month SAAR), mainly due to the continued correction in vegetable prices, which offset the mild uptick in pork and rice prices. Non-food inflation remained at around 2 percent. Meanwhile, the contraction in the Producer Price Index (PPI) narrowed to 2.7 percent from 3.6 percent in September, suggesting less upstream deflationary pressure.
We maintain our view that inflation is bottoming out and will gather momentum, though we expect it to remain fairly benign this year. We expect higher year-on-year readings from November due to a reversal of the base effect and a pick-up in food prices. Persistent rises in pork prices, along with utility price reforms, will likely push CPI inflation onto a gradual upward path next year. We expect it to become a major concern in the second half of 2013.
Industrial production growth accelerated to 9.6 percent year on year in October from 9.2 percent in September and the month-on-month growth rate increased by 0.8 percentage point, according to the official data.
This echoes a strong rebound in electricity production data, which picked up to 6.4 percent year on year in October from an unexpectedly low 1.5 percent in September. The recovery in the industrial production reading was mainly driven by heavy industry, where production accelerated to 9.7 percent year on year from 9.3 percent prior, while growth in light industry inched up to 9.1 percent year on year from 9.0 percent. The pick-up in heavy industrial production was more pronounced in the month-on-month growth number, indicating that an increase in investment projects may be around the corner.
Official fixed asset investment growth was 20.7 percent year on year in the first 10 months of the year, translating into marginally higher monthly growth of 22.2 percent year on year in October, the highest reading in 11 months.
By sector, fixed-asset investment in infrastructure maintained robust growth of 25 percent year on year in October, while manufacturing investment grew 20 percent year on year, similar to previous readings. Growth in total planned investments in newly started projects continued to accelerate to 35.2 percent year on year in October from 31.2 percent in September, suggesting that more investment projects will be rolled out in the coming months.
Real sales growth accelerated to 13.5 percent year on year in October from 13.2 percent in September, supported by holiday consumption and solid income growth.
Growth in investment in residential real estate picked up to 13.2 percent year on year in October from 9.9 percent in September. Growth in floor space sold rebounded strongly to 12.2 percent year on year from an average of 8.7 percent in the third quarter, which is encouraging. The decline in area under construction continued to narrow. We believe this indicator could well move back into positive territory in the first quarter of 2013, and make a positive contribution to the economy in the first half of 2013.
Moderate recovery
Overall, the October macro data set is positive for market sentiment and suggests a continuing moderate recovery in China's economy. We believe the monetary policy loosening that started in the second quarter is continuing to have an effect. According to the third-quarter monetary policy report from the People's Bank of China, the weighted average rate of banks' lending dropped to 6.97 percent as of September from 7.6 percent in the first quarter. Fewer loans were priced above the benchmark rate (64 percent in September, compared with 70 percent in March), while around 11 percent of total loans were priced below the benchmark rate, up from only 4.6 percent in March.
We believe China's interest rate-cutting cycle has ended, as the central bank seems to believe that rates are already at an appropriate level, and that a further drop in real lending rates can be achieved via the 30 percent floor of the band.
Given that the economy is stabilizing and showing signs of gradual recovery, we expect a mildly supportive policy stance - characterized by measured and targeted stimulus - for the rest of 2012.
Shen Lan is an economist with Standard Chartered Bank. The opinions are her own.
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