China's disturbing economic data dump

While it would be an exaggeration to suggest the Chinese economy is heading towards a hard landing, there is mounting evidence that the slowdown evident over the past year is more acute that the authorities were expecting.

Sunday's Chinese data dump confirmed that the slowdown in the world's second largest economy continued into the third quarter, although the inflation rate did tick up in August on the back of higher food prices.

The update on the Chinese economy is disappointing given the slowing growth in industrial production (IP) and fixed asset investment. There now seems no doubt that third quarter GDP growth will slow further from the three year low of 7.6 per cent recorded in the second quarter 2012.

Glenn Maguire, Principal of Asia Sentry and a China specialist, said of the Chinese data that, "hopes of stabilisation, yet alone a rebound, in growth in the second half of 2012 remain hopelessly optimistic”.

The 2.0 per cent annual rise in the CPI in August, from 1.8 per cent in July was heavily influenced by a sharp rise in vegetable prices, which rose 23.8 per cent over the year. The CPI excluding food rose by just 0.1 per cent in August and 1.4 per cent through the year suggesting that inflation risks from excess demand in the economy are absent. In other signs that inflation is well contained and will likely remain low, producer prices fell 3.5 per cent in the year to August, dropping further from the 2.9 per cent decline in the prior month.

Perhaps more importantly, China's annual industrial production growth slowed to just 8.9 per cent, the weakest rate of increase in more than three years, which was, of course, at the depths of the global financial crisis. The IP data were weaker than the market consensus for a rise of 9.1 per cent. The slowing in IP fits with the news of falling commodity prices, particularly for base metals including iron ore and steel.

Related to the slow down in industrial production, annual fixed asset investment growth undershot expectations even though it rose 20.2 per cent. The market was expecting a rise of 20.4 per cent. Rounding out the data on Sunday was an in-line result for retail sales which rose at an annual pace of 13.2 per cent. The rise in food prices, ironically, may have boosted the nominal retail spending result.

The economic slowing in China is expected to spark a further round of policy easing, although concern from the authorities about inflation and property prices suggests that policy stimulus is more likely to be through fiscal expansion rather than focused on easier monetary policy.

Just last week, and in a targeted policy response, the Chinese authorities announced a stimulatory infrastructure package which covered over 50 new investment projects totalling around $160 billion. The main focus of the projects is investment in road, railways and ports.

At the APEC summit in Russia, Chinese President Hu Jintao said over the weekend that China will continue to implement pro-active fiscal policy and prudent monetary policy to maintain economic growth and keep inflation stable.

The People's Bank of China has in recent months cut interest rates, lowered the required reserve ratio (RRR) and injected around $190 billion into the economy for new lending. These monetary policy easings have to date not been enough to reverse the slowdown. There seems to be a reluctance to use further monetary policy measures to stimulate activity, given the recent focus of the PBOC on inflation.

This is a new potential risk for China. If the PBOC is tardy when it comes to further easing monetary policy, as its recent focus on inflation dominates its policy thinking, a sharp slow down or even hard landing is possible. At a time when the western economies are in dire straights, meaning demand for Chinese manufactured exports is under pressure, there must be a shift to domestic growth drivers if China is to rebound from the current slowdown. At the moment, the jury is out whether enough is being done to engineer a pick up in growth.

At the end of the data dump, Asia Sentry's Maguire concluded that there is "no evidence the slowdown in China is abating” and that the "Chinese economy remains very weak”. This is not the news that the rest of the world wants to hear, particularly when the eurozone is still in recession and the US is struggling to get traction on the path to higher growth.