Chinese retail sales rose by 13.1 per cent on a year ago (consensus 13.5 per cent); industrial production was up 9.2 per cent (consensus 9.7 per cent); and fixed asset investment over the first seven months of 2012 was up by 20.4 per cent (consensus 20.6 per cent).
- Inflation well contained. China’s annual inflation rate fell from 2.2 per cent to 1.8 per cent in July – a 30 month low. The July result was marginally higher than forecasts centred on a result near 1.7 per cent. Over the month inflation rose by 0.1 per cent after falling by 0.6 per cent in June.
- Business inflation (producer prices) fell by 0.8 per cent in July to stand 2.9 per cent lower than a year ago – a 33-month low.
- Scope to ease policy. The slower pace of growth combined with other data showing that inflation is in control gives the Chinese authorities’ scope to inject further stimulus if necessary in coming months.
What does it all mean?
- There is no doubt the Chinese economy has slowed down over the past year, however it has been a self-induced slowdown to get inflation in check. And that is exactly what has taken place; non-food inflation is barely growing, while food inflation has also slowed dramatically. In addition producer prices (or business inflation) is now going backwards, down by 0.8 per cent in July to stand 2.9 per cent lower than a year ago – a 33-month low.
- And while the latest retail sales and fixed asset investment figures (spending on infrastructure, roads, power plants etc) were below consensus it is really backward looking data (a view of the economic landscape before the policy was eased). In addition the forward looking manufacturing indices seem to suggest that activity levels have bottomed out in recent weeks.
- The latest results provide a strong base to launch a sustainable growth story. Chinese economic growth of around 7.5-8 per cent, pickup in lending, rising domestic income and consumption, robust business investment and inflation below 3 per cent sound like the ideal economic landscape for solid longer-term growth. And when coupled with news in recent weeks that local governments have been ramping up stimulatory measures – tax cuts, consumption subsidies and largely infrastructure investment being fast tracked, it does suggest that Chinese authorities have successfully engineered a “soft landing” for their economy.
- Interestingly it does look like the recent fall in the headline inflation rate is waning and will bottom out in coming months. As such it is likely that policymakers will be careful not to crank up growth too quickly. The focus will shift to judging the impact from the two interest rate cuts implemented over the past few months. However policymakers still have avenues to stimulate if they deem it is necessary.
What do the figures show?
- The annual rate of consumer price inflation eased from 2.2 per cent to 1.8 in July – a 30-month low. The June result was marginally higher than forecasts centered on a result near 1.7 per cent. Over the month inflation rose by 0.1 per cent in July after a 0.6 per cent slide in June.
- Food prices rose by 2.4 per cent over the year to July (3.8 per cent in June) while non-food prices rose by just 1.5 per cent in the year to July (1.4 per cent in June).
- Producer prices (business inflation) fell by 0.8 per cent in July to stand 2.9 per cent lower than a year ago – a 33-month low. The annual rate of producer price inflation peaked in July 2011 at 7.5 per cent and has been declining since.
- Industrial output expanded at a 9.2 per cent annual pace in July, down from 9.5 per cent in June and below forecasts centred on a result near 9.7 per cent. Production is well off the highs of 20.7 per cent annual growth in January/February 2010.
- China’s urban fixed asset investment, such as spending on roads and power plants, grew at a 20.4 per cent in 2012 to date (January – July), below forecasts (20.6 per cent) and in line from 20.4 per cent in June.
Retail sales grew at a 13.1 per cent annual rate in July, down from 13.7 per cent in June and below forecasts, centred on 13.5 per cent annual growth.
What is the importance of the economic data?
- China’s National Bureau of Statistics releases its monthly economic statistics around the middle of each month. Quarterly GDP data is released around the 16th of January, April, July and October. China is Australia’s largest trading partner and changes in the Chinese economic have major implications for the Aussie economy.
What are the implications for interest rates and investors?
- Chinese policymakers spent the majority of the last year in tightening policy to get inflation in check; however the central bank underestimated was the escalating European debt crisis. The deeper recession in the Euro zone compounded the slowdown in Chinese exports. Importantly policymakers have been quick to shift to a more stimulatory stance in recent months.
- The latest Chinese economic data is encouraging for Australian businesses. China has successfully slowed its economy to a more sustainable growth rate. Now the challenge is to lift momentum, but not so far as to reignite inflation.
- China faces challenges – what country doesn’t. A key challenge is to rebalance growth in favour of household spending and the keep inflation under control. The Chinese economic data will alleviate global concerns that the world’s powerhouse economy was at risk of a hard landing.