With the Japanese and the Euro-zone economies in the doldrums, and the fragile economic recovery in the US in grave danger from the ‘fiscal cliff,’ the fast-developing economies out of Asia will probably do the heavy lifting as far as global growth is concerned.
The Chinese economy has been a powerhouse of growth this decade, but of late there have been troubling signs of a slowdown in growth. The economy contracted over the last seven quarters on the trot – with growth down to a low (for China) 7.4% during the September quarter. Chinese policy-makers responded by implementing growth-oriented policies over the recent months, such as the lowering of the benchmark interest rate (twice) and reduction in the reserve requirement ratios (also twice).
In this backdrop, the recent economic data out of China has been comforting, to say the least.
China delivered a resounding beat on estimates of its export performance for the month of October. Exports grew 11.6 % whereas analysts expected only 10% year-on-year. This was the fastest rate of growth seen in five months.
The data led analysts to jettison fears of a ‘hard landing’ for the Chinese economy, and crank up their estimates for growth during 2013.
Imports by the Chinese economy were flat at 2.4% on an annual basis, and missed economists’ expectations of 3.2%. Interestingly, higher imports of agricultural products such as corn and edible oil counterbalanced declining imports of iron ore.
October trade balance
Higher exports and unchanged imports led to the trade surplus increasing to $31.99 billion compared to the previous reading of $27.67 billion and the $27.15 billion expected. This is the highest trade surplus recorded since January of 2009.
Consumer Price Index (October 2012)
China’s main gauge of inflation, the Consumer Price Index fell in October to 1.7% on an annual basis, the lowest reading seen in 33 months. The reading was down from 2% in August and 1.9% in September. The main reason for the fall was apparently food prices, which showed a lower trend.
The declining trend in inflation is an encouraging sign for the economy, as it strengthens policymakers’ hands in the pursuit of growth by lowering the interest rate regime, or other monetary easing or incentive measures.
Controlled inflation probably led to the People’s Bank of China pumping in a record amount of cash flow during the week ended November 1. Using repo operations the bank injected 379 billion Yuan as additional liquidity, an all-time weekly high, into the economy.
Producer Price Index (October 2012)
Chinese inflation at the wholesale level is measured by the Producer Price index. For October the PPI showed a fall of 2.8% on an annual basis compared to 3.6% in September. This was the eighth consecutive month for a decline in the PPI. However, since the rate of decline appears to be slowing, analysts are of the view that the economy may now be stabilizing. A declining wholesale inflation is also positive for the economy.
Fixed Assets Investment (October 2012)
Chinese fixed asset investment climbed 20.7% year-on-year to 29.25 trillion Yuan (about US$4.6 trillion). This was better than analysts’ expectations of 20.6% and the previous reading of 20.5%. The rising investment trend is a plus point for the economy
Industrial Production (October 2012)
After printing 8.9% in August, and 9.2% in September, the Chinese economy reported a heartening industrial production reading in October of 9.6% growth, beating expectations of 9.4%. This is likely evidence that the economy may have bottomed out after the downward trend seen over the last three years.
Retail Sales (October 2012)
In another encouraging sign of strength in the domestic economy, Chinese retail sales during October increased 14.5% compared to the same period last year, to 1.89 trillion Yuan and was the highest seen since March. Interestingly, the growth was more or less even between the urban and rural sectors – urban consumption rose 14.5% whereas the ruler population consumed 14.8% higher.
China Central Bank Outlook
The Chinese central bank reviewed the economy at its third-quarter monetary policy meeting and said, “Current economic and financial operations have shown signs of stabilizing and consumer prices are basically stable.” The statement of the bank also said it would continue to use monetary means for growing credit in the economy at a reasonable pace, and in line with objectives of social financing. However, it expressed concern over the likely import of inflation due to the massive monetary easing measures in the US and European economies. In sum the bank said, “We will continue to implement the prudent monetary policy, make it more targeted, flexible and forward-looking, while fine-tuning it according to the economic situation development.”
China – What to Expect
Looking at the above data trend, it does appear that the Chinese economy may be turning around, slowly, just like a huge tanker that takes a while to change course in the other direction. Rising exports, manufacturing and retail spending in an environment of relatively flat inflation and a dovish central bank stance lead us to the hopeful conclusion that China may yet return to its normal growth levels and lend a hand supporting global growth.