This Is Why Markets Are Celebrating The Disappointing Chinese Data

chinese drummers

Photo: Jamie McDonald/Getty Images

Stocks rallied in China, after last night’s data dump showed that inflation had cooled and industrial production had declined leaving room for more monetary easing.Here are the numbers, and their implications for the Chinese economy:


Consumer prices climbed 1.8 per cent year-over-year (YoY), slightly above the consensus estimate of 1.7 per cent.

Producer prices declined 2.9 per cent YoY, against projections of a 2.5 per cent decline.

Declining inflation numbers should be a positive for the market since it leaves room for policy easing and stimulus, and declining raw material prices should help since China is “the largest importer of commodities”, according to Bank of America analyst Ting Lu. But the rise in pork prices does have analysts watching food inflation numbers.

But this divergence in consumer and producer prices poses a challenge for the People’s Bank of China. Societe Generale’s Wei Yao writes, that the central bank will now have to figure out whether to keep a positive real deposit rate to help households and bolster spending, or if it should shift focus and help the sectors that are seeing their profits hit and that are being burdened by excess capacity (where demand is lower that what it can supply).

“We think the PBoC will try to strike a difficult balance by keeping benchmark interest rates unchanged and, at the same time, easing liquidity conditions to lower costs of capital indirectly,” writes Yao.

For a few months now, concerns about deflation have picked up, and many are concerned about what it could mean for Chinese employment numbers. But Lu writes that “the possibility of sustained deflation in China is rather small and falling commodity prices are largely good for China.”

Industrial production

Industrial production climbed 9.2 per cent YoY missing expectations of a 9.7 per cent rise.

Industrial production likely disappointed because the scale of policy easing has still been small and because there is a lag in the impact of such easing on an economy, according to Lu. Moreover, market confidence has been weak given Beijing’s mixed messages from Beijing on its property curbs, and because of poor weather in July.

But without a rebound in industrial production numbers Chinese GDP could slow more than expected to 7.4 or 7.5 per cent in the third quarter.

This isn’t all bad though. With declining inflation and industrial production Lu expects an “imminent 50 basis point reserve requirement ratio cut” with a total of three before the year-end, and two 25 basis point int rest rate cuts this year.

Other key data

china Fai chart

Photo: Societe Generale

Fixed asset investment climbed 20.4 per cent YoY. Year-to-date FAI climbed 20.4 per cent, missing expectations of 20.6 per cent growth.FAI accounts for over 50 per cent of GDP and is an all-important measure of government spending. The breakdown of FAI showed that infrastructure investment is picking up, but has been “too modest to offset the the drag from the housing sector,” according to Yao.

Retail sales increased 13.1 per cent YoY, missing expectations of 13.6 per cent growth.

But the weaker data doesn’t mean that Beijing is unlikely to flood the market with the 4 trillion yuan stimulus like it did in 2009 and the modest pick-up in infrastructure investment is unlikely to be enough to boost economic growth. Given all this data, SocGen’s Yao has reduced her Q3 GDP projections to 7.7 per cent YoY, down from 8 per cent and full-year growth to 7.8 per cent, down from 7.9 per cent.

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