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  Chinese growth drivers are shifting from industrial production to household spending.

  Chinese economic data: Industrial production rose at a 6.9 per cent annual rate in August, the slowest growth in 5½ years (December 2008) and below forecasts. Retail sales rose at an 11.9 per cent annual rate in August, mildly below forecasts (+12.1 per cent). Real annual growth was estimated at 10.6 per cent – the fastest growth in eight months. And urban investment in the first eight months of 2014 was up 16.5 per cent on a year ago (forecast +16.9 per cent).

• Previously released Chinese data showed: Consumer prices rose by 2.0 per cent over the year to August; Producer prices fell by 1.2 per cent over the year to August; the Chinese trade balance improved from a surplus of US$47.3 billion in July to a record high surplus of US$49.83 billion in August.

What does it all mean?

• It seems that every country is experiencing a transition of sorts. In China, the growth drivers are shifting from industrial production to household spending. In Australia, the growth drivers are shifting from mining construction to home building and resource exports. And in the US, a transition will soon start from money printing and zero interest rates to a more “normal” monetary policy situation. The point is that these transitions may or may not go to plan. So policymakers need to tread warily.
• There is no doubt the drop in Chinese production growth comes as a surprise. Usually economic data is not too far away from forecasts – that certainly was the case for all the other monthly variables in August. Of course surprises can happen – witness Australian employment figures over the past few months.
• While production is now growing at the slowest pace in 5½ years, the good news is that policymakers are in a position to provide “targeted” stimulus with inflation under control. The other good news is that retail sales rose at the fastest pace in real terms in eight months. So the ‘baton pass’ is occurring, the hope being is that it remains a smooth change.

 What does the data show?

Chinese economic data

• Industrial production rose at a 6.9 per cent annual rate in August, the slowest growth since December 2008, below the forecast average (8.8 per cent) and down from the 9.0 per cent annual rate in July. Production was up by 8.5 per cent on a year ago for the first eight months of 2014.
• In August pig iron production was up 0.2 per cent on a year ago with thermal power capacity down 11.3 per cent; computer equipment down 8.5 per cent; mobile phones down 2.3 per cent; flat glass down 3.8 per cent. But power generating equipment was up 26.3 per cent. Also of note steel was up 2.4 per cent, oil production rose 4.4 per cent and autos were up 3.1 per cent.
• Retail sales rose at an 11.9 per cent annual rate in August, mildly below forecasts (+12.1 per cent) and down from the 12.2 per cent annual rate in July. Over 2014, annual growth has averaged 12.1 per cent. But in real terms, spending was up 10.6 per cent in August – the fastest growth in eight months. Weakest growth in August was in car sales, up by just 5.3 per cent. But communications equipment was up 31.8 per cent with medicines up 16.5 per cent.
• In August, retail sales rose 0.92 per cent, the fastest growth in three months and in line with the average monthly growth recorded over 2014.
• Urban investment rose at a 16.5 per cent annual rate in the first eight months of 2014, below forecasts of a 16.9 per cent increase and below the 17.0 per cent growth recorded for the seven months to July.

Previously released Chinese data

• The M2 money supply measure rose by 12.8 per cent in the year to August, short of the forecast growth of 13.4 per cent and down from 13.5 per cent in July.
• New Yuan lending totalled 702.5 billion in August, above forecasts of 700 billion Yuan and up from 385.2 billion Yuan in July.
• Outstanding loans grew at a 13.3 per cent annual rate in August, up from the expected 13.2 per cent rise but down from the 13.4 per cent growth in the year to July.
• The Chinese trade surplus rose from US$47.3 billion to a record high of US$49.8 billion in August. Economists had forecast a US$40 billion surplus. Exports were up 9.4 per cent on a year ago (forecast +8.0 per cent) while imports fell 2.4 per cent (forecast +1.7 per cent). In July, exports were up 14.5 per cent on a year earlier with imports down 1.6 per cent.
• China’s consumer prices rose by 2.0 per cent over the year to August while producer prices fell by 1.2 per cent over the same period. Both results were softer than economist forecasts.
• China’s National Bureau of Statistics releases its monthly economic statistics around mid-month. Quarterly GDP data is released around the 16th of January, April, July and October. China’s Customs Office releases trade data, and the People’s Bank of China releases financial statistics, around the 10^th of each month. China is Australia’s largest trading partner and changes in the Chinese economic have major implications for the Aussie economy
• The Reserve Bank has even more reason to stay on the interest rate sidelines. Just like in Australia, there is a transition in China from production-fuelled growth to that driven by retail spending. There could be blips along the way. And slower Chinese production should lead to a weaker Australian dollar, providing stimulus to Australian businesses, especially exporters and manufacturers.

What is the importance of the economic data?

• China’s National Bureau of Statistics releases its monthly economic statistics around mid-month. Quarterly GDP data is released around the 16th of January, April, July and October. China’s Customs Office releases trade data, and the People’s Bank of China releases financial statistics, around the 10^th of each month. 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?

• The Reserve Bank has even more reason to stay on the interest rate sidelines. Just like in Australia, there is a transition in China from production-fuelled growth to that driven by retail spending. There could be blips along the way. And slower Chinese production should lead to a weaker Australian dollar, providing stimulus to Australian businesses, especially exporters and manufacturers.

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