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Wednesday, June 10, 2009

China's Prices Continue To Decline As Industry Recovers (Updated)

Consumer prices fell again in China in May, although less sharply than they did in April. This lead some to hope that deflationary pressures are begining to ease, but I think it is far too early to start drawing this kind of conclusion. Indeed, like Brad Setser:

"I am curious to see what China’s May trade data tells us. If China truly is going to lead the global recovery, China needs to import more – and not just import more commodities for its (growing) strategic stockpiles.”
The consumer price index fell 1.4 per cent from a year earlier, compared with a 1.5 per cent decline in April, marking the fourth straight month of falling prices. On a month-on-month basis, the National Bureau of Statistics said the CPI dropped 0.3 per cent from April’s level.

The decline in food prices eased significantly, from 1.3 per cent in April to 0.6 per cent in May. Prices of non-food items, however, fell 1.7 per cent last month, more than April’s 1.5 per cent. However, the producer price index, which measures prices paid at the factory gate, fell 7.2 per cent in May. This was sharper than the 6.6 per cent fall in April.

Manufacturing On The Rebound?

The CLSA China Purchasing Managers Index rose to 51.2 in May from 50.1 in April, making May the second consecutive month the CLSA PMI was above 50.0, after eight months of being below the critical line. The rate of destocking increased in May, which was encouraging given there is some anecdotal evidence that production may be running ahead of orders. On aggregate the reverse seems to be true. The CLSA China PMI is compiled by U.K.-based research firm Markit Economics. The export order index increased to 50.1, the first expansion in 11 months. The output index fell to 56.9 from 57.4 and the new order index dropped to 56.2 from 56.6.

In fact in China there are two indexes, a fact which has lead to some controversy. The second index produced by the government-backed Federation of Logistics & Purchasing has repeatedly shown slightly higher readings, a feature which may be the result of giving a slightly larger weighting to the state enterprises, which are more oriented towards the domestic market. The May PMI saw the CFLP benchmark reading fall to 53.1 in May from 53.5 in April. This was the third consecutive month this index has held above 50.

So despite a good deal of controversy about what exactly is happening in China, and how sustainable what is happening actually is, it does seem that, for whatever reason, manufacturing industry is expanding at this point.

China’s Industrial Production Figures Press Leaked

The 21st Century Business Herald have reported China’s industrial production ahead of the official release date. The report says fixed-asset investments for May, due out Thursday, will show a 32.9% rise, while the month's industrial production and retail sales, due Friday, will post gains of 8.9% and 15.2%, respectively.

The figures were apparently derived from data circulating within government days ahead of public announcement. Reports in the mainland Chinese "21st Century Business Herald" and in Hong Kong's "Ming Pao" had already managed to predict the above consumer and producer price results ahead of today's official release, which raises questions about what exactly is going on here.

The accuracy of these newspaper forecasts is better than those of most economists, raising more than just eyebrows. Merrill Lynch said the results, rather than being a lucky coincidence, show that the "whispered numbers" referred in the reports are reliable. "Today's release confirms those whispered inflation numbers, meaning other whispered numbers are likely to be highly credible," Merrill Lynch analysts said in a research note today.

Retail Sales, Industrial Output and New Lending Data

China’s new lending doubled in May and industrial output and retail sales climbed pretty much in line with the data which was leaked earlier in the week by 21st Century Business Herald (see above).

New loans jumped to 664.5 billion yuan ($97 billion) from 318.5 billion yuan a year earlier. Industrial-output growth accelerated to 8.9 percent year on year and sales rose 15.2 percent.

Today’s data add to accelerating fixed-asset investment and surging auto and property sales in signaling that rapidly growing bank lending is succesfully countering the exports slump - for the time being anyway. But this very same record lending is stoking concern that China’s recovery may come at the expense of inflating asset bubbles and adding to the bank bad loan books.

M2, the broadest measure of money supply, rose 25.7 percent in May from a year earlier, according to central bank data, following a record 26 percent gain in April. Fitch Ratings said last month that it’s “increasingly wary” of China’s banking industry as it expects an increase in bad debts, and the nation’s banking regulator has urged lenders to ensure they don’t loosen management of loans.

Societe Generale note the following in today's research report:

China’s growth moving into dangerous territory

To describe the economic support measures in place in the Chinese economy as expansionary fiscal policy is not entirely correct. For the money is not being handed out from the public purse. It is being handed out by the Banks. Sure, they are acting as fiscal agents for Beijing, but the point highlights how China is enjoying a heady liquidity boom. It has been these liquidity booms that have always tripped China up....... and requires liquidity drainage that often overshoots. Given Chinese banks extended nearly CNY5trn of lending in the first quarter alone, this was equivalent to 70% of GDP, These liquidity booms are the types that China has always gotten into...... The sheer size of lending in the first quarter was equivalent to around 70% of that quarters GDP. Full-year lending is now likely to be close to CNY10trn – equivalent to nearly 30% of 2008 GDP.

On the face of it, China's car industry is among the winners from government efforts to spur growth, as China extends its lead over the U.S. as the world’s biggest auto market this year, with output climbing 29 percent in May. But is this as simple as it seems. As they say here, perhaps not:

At the same time, though prices vary from city to city, it is fair to say
China’s housing market which is said to have dropped 20% since this time last
year has largely made that back up this year as prices have rebounded.

All in all China looks in robust health and set to resume its place as
the engine of world growth just as soon as the rest of the world gets its act
together – right? Well we hate to be Doubting Thomas’s but well we have our
doubts. Those house sales have been supported by easy loans and reduced interest
rates. That is a phenomenon that the government could keep in place for some
time, years possibly providing the housing market doesn’t begin to overheat
again. But exports are still down, by 20% year over year according to the well
respected Brad Setser, ignoring the fact the market added another 30% in Q3 2008.

There are some apparently contradictory numbers coming out of China at
the moment. Take those car sales as an example. Our man on the ground tells us
BYD, a noted Chinese car maker, reported 30,000 car sales of one model by end of
last year, but the number plate agency recorded only 10,000 new cars of that
model registered for use on the road. What happened to the other 20,000 are they
running around without number plates? In a police state, I don’t think so. Our
understanding is auto sales are recorded in China when they leave the factory,
not when they are registered on the road, so dealers can build up inventory
while car “sales” are rising.

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