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Monday, May 11, 2009

China's Manufacturing Industry Expands In April While Prices Fall (Updated)

China’s manufacturing expanded for the first time in either eight or nine months (depending on which index you chose - see below) as the decline in export orders moderated and investment surged on the back of the government’s 4 trillion yuan ($586 billion) stimulus package.

The CLSA China Purchasing Managers’ Index rose to a seasonally adjusted 50.1 in April from 44.8 in March.

The output index climbed to 51.3 from 44.3, the first expansion in nine months, while the reading for export orders rose to 48.8 from 41.4 in March. The total new-orders index climbed to 50.9 from 43.6 and the employment index rose to 50.9 from 47.1, the first expansions in nine months for both measures.

On the other hand the official (government sponsored) China Federation of Logistics & Purchasing manufacturing index also showed growth, in this case for the second consecutive month, with the headline index rising to 53.5 in April from 52.4 in March.

There are various differences between the two indexes (for a summary of the issues raised see my last month's post here), but the gist of the matter is that the government-backed measure is weighted more than the CLSA index toward large state-owned enterprises, which have benefited more directly from the government stimulus measures.

Is China Suffering Outright Deflation?

China’s consumer prices fell for a third month running in April and were down 1.5 percent from a year earlier, after falling 1.2 percent in March.

Producer prices fell 6.6 percent, following a 6 percent drop in March. The fall, which was largely produced by declining energy prices, was the biggest year on year drop since the turn of the century.

Bank lending also slowed in April, following three months of very strong growth. According to central bank Governor Zhou Xiaochuan lending was “approximately” 600 billion yuan ($88 billion) during the month, about a third of the record 1.89 trillion yuan in March. The official figure is due to be released this week. If confirmed, new loans of 600 billion yuan would be about 30 percent up on April 2008 which compares with a sixfold increase in March.

Update - Exports Fall Year On Year In April

The latest trade figures from China seem to confirm the idea that world trade is NOT taking off at this point. As a result China's economy is coming under a lot of pressure. While March overseas sales were down 17.1 percent from March 2008 - to $90.29 billion - in April exports were running at $91.9 billion, very slightly up on March, but 22.6% down on April 2008. In fact seasonally adjusted figures suggest a 32.8 percent month on month increase in exports from March and a 14 percent increase in imports, according to calculations from the Chinese Customs Bureau. So it is not all bad news. On the other hand we need to think about the fact that China currently has a lot more export capacity than it did a year ago.

Basically internal demand is largely being maintained by increasing government spending - hence the news that investment in factories and property jumped 30.5 percent from a year earlier in the first four months of the year, thanks largely to the wave of bank loans for government stimulus projects - but this is only a stopgap.

China will have to await a rebound in global trade (and we have no idea when that will come, or how) and grit its teeth in the meantime. The OECD currently forecasts that global trade will shrink 13 percent in 2009 as banks cut back on credit to exporters and importers, so there is still some considerable way to go with all this.

Industrial Ouput Growth Slows

China’s industrial output growth slowed to an annual 7.3 per cent in April, from 8.3 per cent growth in March, only adding to all the doubts over whether a Chinese recovery really is under way. The growth in factory output last month was less than half the year-on-year rate achieved in in April 2008 and most of the growth seems to have been a result of the government’s economic stimulus measures.

But retail sale growth remained reasonably healthy in April, rising by 14.8 per cent from a year earlier (to Rmb934.32bn). This was a similar rise to March’s 14.7 per cent growth. Since these numbers are not price adjusted I have created a "home made" price adjusted version, which can be seen for comparative purposes in the chart below. As we can see, nominal (current price) sales growth was much higher than real growth during the inflation burst, but the nominal chart drops below the skyline as deflation sets in an prices start to fall. This then is a fairly graphic illustration of what deflation means, since we can now expect this real/nominal disparity to continue, making everyone's economic decision making just that bit more difficult.

Another factor adding to the general state of confusion were figures released by the government on Wednesday that showing that electricity production, which is often regarded as a proxy for economic growth in China, fell by 3.5 per cent from a year earlier in April. When asked, government officials have been repeatedly unable to explain how industrial production can be growing while electricity production is falling. Since it is unlikely that Chinese industries are making large advances in energy conservation the most probable explanation is that the current slowdown has had a more severe impact on energy-intensive heavy industry. One example of this would be that China’s crude steel output fell 4 per cent in April from March. Below you can see the OECD leading indicator chart (which includes electricity output), and this may give is the nearest indication we are going to get of the path of the Chinese economy in recent months.

According to the stats office, total investment in fixed assets were 3,708.2 billion yuan from January to April, a year-on-year rise of 30.5 percent. Of which, state-owned and state-holding enterprises invested 1,605.5 billion yuan, surging 39.3 percent, while real estate development, valued at 729.0 billion yuan, went up only 4.9 percent. I think this just about says it all. Exports are way down, real estate is stalled, and output is being ramped up in the state run light industry sector, and in civil engineering.

And right now, as mention in the post above, internal price deflation is steadily setting in while the rate of new loan growth is slowing. So, hold tight everyone, this could get to be a bumpy ride.