Data Scan

August 09, 2012

China July Expenditure Data

The Chinese economy has not troughed
Retail Sales Last: 13.7% Expected: +13.5% Actual: 13.1% Industrial Prodn Last: 9.5% Expected: 9.7% Actual: 9.2% Fixed Asset Investment Last: 20.4% Expected: 20.6% Actual: 20.4% Assessment: As the nexus of the global trade and production cycle, further weakness in Chinese expenditures reflects the negative self-reinforcing nature of a synchronized global slowdown.

Growth in Chinas major expenditures continued to decelerate in July, wrong-footing a consensus looking for an improvement in year-to growth rates. Slower expenditure growth confirms an economy still to trough, not one that has. Industrial production was perhaps the most disappointing of the three key expenditure figures as Chinas manufacturing sector continues its slow grind to a halt. Production increased by 0.66% from June to July compared to 0.76%MoM from May to June. The annualized pace of production growth has slowed to around 7.8% in July and this is where we would expect the year-to rate of IP to trough in the fourth quarter, in the absence of a recovery in external demand. The weakness in IP suggests the July export figures, released tomorrow, will also disappoint. We would look for export growth to slow to just 5.0%YoY. Fixed Asset Investment is clearly been stifled by constrained credit growth. The failure of FAI to gain traction despite Beijing fast-tracking a new round of infrastructure projects, most notably in Hunan province, speaks of problems with once again engaging the Banks as fiscal agents. Though infrastructure spending is indeed picking up, the elasticity of its response to new Beijing mandates is much lower than in the 2008-09 cycle. With the ability of banks to lend constrained by the loan-to-deposit ratio and a still historically high RRR, there will not be as quick a turnaround in FAI in 2012 as there was in 2009.

Thursday August 09, 2012.

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Data Scan: Concise, timely analysis of breaking economic data points.

An immediate cut in the RRR is a necessary but not sufficient condition for FAI to gain traction. Some modification of loan-to-deposit regulations also now appears necessary if investment is to fire. The fall-off in urban retail sales growth is a concern to us, confirming the pick-up in the pace of job-shedding in urban areas is now weighing on consumption spending. Retail sales in urban areas decelerated from 13.7%YoY growth in June to 13.1%YoY growth in June whereas rural sales slowed from 14.0%YoY to 13.6%YoY. The difference reflects the stickier nature of spending in rural areas given a greater amount of spending is allocated to food and shelter. Sales of discretionary and/or luxury goods decelerated smartly with jewelry and automobile spending slowing markedly. The HSBC-Markit PMI for July revealed that job-shedding had reached a 40-month high and the slowing in discretionary areas of retail spending is entirely consistent with that. A well behaved property sector equals lower growth. The constraints on the property sector are clearly suppressing retail activity with construction material growth slowing from 29.3%YoY to 25.5%YoY and furniture moderating from 28.7%YoY to 26.4%YoY. Whether Beijing is prepared to tolerate a reflation of a now contained housing bubble will be the key to the retail outlook. Policy hard choices for Beijing. The slowdown of the Chinese economy has continued into July and the ultimate arresting of this slowdown will require difficult policy choices for Beijing that ultimately jeapordise the longer term growth outlook. If Beijing wishes to immediately bolster consumption, it must allow some reflation of the property sector. Similarly, if it wishes to bolster fixed-asset investment, it must once again encourage largesse in bank lending. There are enormous opportunity costs in these policy choices and the containment of its property bubble and wild-west bank lending were hard-fought achievements. The fact that there will not be the same immediate reaction function in bank lending, credit growth, property construction and fixed asset investment that we saw in early 2009 means that the eventual bottoming of the Chinese economy will take longer to occur and will also occur at an absolute lower level of growth. The Chinese economy may well be bottoming, but it will not have troughed until some unpalatable compromises on policy have been made.

Thursday August 09, 2012.

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Data Scan: Concise, timely analysis of breaking economic data points.

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