China Looks Ready To Give Up The Slowdown And Go Full Throttle

The Chinese economy will not experience a “double-dip” nor big fluctuations, and the government is capable and confident of keeping steady and relatively fast growth in the long-run, an official said Tuesday.

Or so said Xinhua, the government run media organisation last week (here). This view has been supported by recent data released by the National Bureau of Statistics showing that industrial activity had cooled to a still strong 14.0% annualised rate in July and that fixed asset investment was still climbing, with residential construction investment up 36.4% compared to the same period last year.

Perhaps it is for this reason that the headlines remain focussed on inflation (here – CPI was up again to 6.5% in July with PPI even higher at 7.5%). The rise in consumer prices was driven by a 14.8% increase in food costs – though officials believe inflation has peaked:

Zhou Wangjun, vice director of the National Development and Reform Commission’s pricing department, reiterated that the current round of inflation is approaching a turning point after rising 25 months, and price rises will likely ease for the rest of the year.

Taken at face value this would suggest that there aren’t further interest rate hikes on the agenda – though it’s notable that Zhou Wangjun warned of a “big possibility that the United State will introduce a third round of quantitative easing policy to repay debt and boost economic growth, which may push up prices of international commodities and increase pressure of imported inflation.”

Manufacturing data suggests economy is slowing 

In contrast, the latest manufacturing survey compiled by Markit (here) is suggesting that this sector of the economy is now contracting:


They note that these results are consistent with recent electricity consumption trends:



Looking to the OECD’s Composite Leading Indicator, that lags Markit’s PMI data by a month, it seems to confirm that China’s industrial production has been slowing.



A reading below 100.0 in June is indicative of a mild contraction. Note too that the current reading in the CLI is lower than that recorded in mid-2010. This would all seem to confirm that the manufacturing sector in China has indeed been struggling under the tighter money policy of China’s central bank.

Monetary constraints have been eased

China’s economic cycle has tended to be a little ahead of the developed world over recent years, perhaps this pattern is about to be repeated? Notably, it appears that money conditions have eased over recent weeks as evidenced by falling short term interest rates in China (following is a chart of the overnight Shibor rate):



It is perhaps for this reason that the authorities are more hopeful that economic activity is set to stabilise. Looking to the rate of change in the OECD’s leading indicator, there is the suggestion that the pace of the contraction had been easing going into July.




Infrastructure investment has been critical to maintaining China’s growth since the global debt deleveraging collapse began in 2007. For good or ill, it looks like China remains bound to this model for the forseeable future. With money conditions easing and the rapid growth of yuan denominated debt issuance out of Hong Kong, it may be that China has set the stage for another round of construction driven spending to stimulate economic growth. In any event, we will continue to watch the evolution of liquidity in China for clues as to the direction of its economy.

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