Emerging Market Macro Comment Recovery In Chinese Growth Is On Track

09 June 2009

Emerging Markets Macro Comment Serdar Küçükakιn, Senior Economist

Recovery in Chinese growth is on track •

Coincident indicators somewhat mixed

•

Leading indicators point to improvement

Although the April activity indicators are somewhat mixed,

The pace of retail sales growth has remained virtually

they support our view of a continued recovery in the

unchanged, with a figure of 14.8% yoy being recorded for April,

months ahead. Growth in fixed asset investments has

compared to 14.7% yoy in March. Retail sales were particularly

continued to accelerate and consumption seems to have

boosted by vehicle sales, which hit a record monthly high of

held

production

1.15 million units sold. So far, therefore, the retail sector seems

moderated on weak exports and continued inventory

to be holding up quite well, but it should be noted that some of

reduction.

this strength is attributable to public-sector measures such as

up

quite

well.

However

industrial

tax cuts and subsidies. Coincident indicators somewhat mixed Investments in fixed assets accelerated further in April. The

Growth in industrial production slowed to 7.3% yoy in April

figure of 30.5% yoy (up from 28.6% in March) was

from the strong 8.3% yoy recorded in March. In our view the

considerably higher than what the markets had been

weaker-than-expected IP is partly attributable to continued

expecting. In our view, this acceleration clearly reflects the

reductions in inventories, as well as to a further decline in

positive impact of the enormous fiscal stimulus packages

exports. Industrial production should continue to be supported

announced last November. A commonly heard criticism of

by strong growth in investments, although weak exports and

these packages has been that they are mainly targeting the

inventory dynamics are likely to remain a drag in the months

eastern urban areas and that rural areas are not benefiting at

ahead.

all. The lion’s share of the newly started projects has allegedly been awarded in urban areas, with rural areas getting very little

Product inventories (electronics & comm. equipment)

support from the government. This claim, however, is not

% yoy

justified as investment growth in the primary industry has always been very robust and actually jumped considerably in response to the implementation of the fiscal stimulus packages.

Investment % yoy

100 80 60 40 20 0 -20 -40

120 100 80 60 40

35 30 25 20 15 10 5 0 -5 -10 00

01

02

03

04

05

06

07

08

09

Source: CEIC

20 0 05

06

07

08

09

The decline in exports on a yearly basis came in much worse than expected, with Q1’s 20.1% yoy drop increasing to 22.6%

Newly started projects (lhs)

yoy in April. Although the April data are undeniably bad, the

Invesmtent in primary industry (rhs)

increasingly positive signals for the region as a whole –

Source: CEIC

including, for example, the latest PMI, which shows the Singaporean economy returning to growth in May and the contraction of the region’s industrial economy becoming

SERDAR KÜÇÜKAKΙN +31 (0)20 629 5086

ECONOMICS DEPARTMENT

09 June 2009 considerably less severe – should help to boost China’s export

billion, which is considerably lower than the record high of

performance in the months ahead. The fall in imports slowed in

CNY1.89 trillion recorded in March.

April to 23.0% yoy, compared to 25.2% yoy in March. This resulted

about

In our view, there are two possible reasons for the slowdown in

USD13.4 billion in April, compared to USD18.6 billion in March.

in

the

trade

surplus

narrowing

to

new lending. Firstly, the previously strong pace of credit expansion was designed partly to provide matching funding for

Leading indicators point to improvement

government-funded projects. The second tranche of the

There have been quite some discussions among economists in

government’s funding of infrastructure projects was disbursed

recent weeks about China’s May PMI figures, which at the time

in March this year, and this boosted that month’s credit growth.

were shortly due for publication. China publishes two PMI

Credit growth will undeniably get another boost when the next

figures: a semi-official figure and a figurer that, as in the West,

tranche is made available. Secondly, the strong increase in

is compiled by a private institution.

short-term loans and discounted bills was partly attributable to banks boosting their loan books, while businesses used the

The story behind the discussions was a belief that the official

extra credit available to overcome their financing difficulties.

PMI could not really be trusted because it originated from a

The significance of both factors has now decreased. Overall,

semi-government body. Specific comments were made about

we expect credit and broad money to continue growing

‘strange’ seasonal effects in the index. In the short, four-year

robustly, albeit at a slower rate than in the first few months of

history of the index, the PMI has previously always recorded a

2009.

substantial fall from April to May. That could also happen this year, some economists warned, and the index would then fall

New loans

below the critical barrier of 50. Interestingly, however, this did

Billions of renminbi

not happen this year. Instead, the index fell only marginally from 53.5 to 53.1, and the economy is clearly still continuing to

2000

grow. A point of particular interest is the fact that the new export orders component rose from 49.1 to 50.1, which means, according to this index, that foreign demand for Chinese goods started rising again in May. Various market participants were also firmly convinced that the private PMI index would also drop below the critical barrier of 50 because, it was claimed, the government’s efforts were

1500 1000 500 0 04

05

06

07

08

09

proving far less successful than officially reported. We do not share this criticism. Although we, too, have seen the delays in

Source: Bloomberg

various public-sector projects, we realise that reality is always somewhat more ‘challenging’ than the situation on the drawing board. The bottom line is that the private PMI has continued to strengthen, rising from 50.1 in April to 51.2 in May. In other words, China has clearly managed to identify the way forward for its economy, both according to the ‘official’ and the private figures. The yoy rate of growth in broad money and bank credit has remained strong, with M2 growth rising to a record high of 26.0% in April compared to 25.5% in March. However the growth in new lending dropped sharply in April to CNY 591.8

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SERDAR KUCUKAKIN +31 (0)20 629 5086

ECONOMICS DEPARTMENT