[CommSec Research]China: Solid growth, but inflation still the bogy

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China: Solid growth, but inflation still the bogy

Chinese economic data

• Chinese economic activity was faster than expected in the first three months of the year. The Chinese economy grew at a 9.7 per cent annual rate in the March quarter (consensus 9.4 per cent) only slightly down from 9.8 per cent in the previous quarter.
• China’s industrial production grew at a 14.8 per cent annual pace in March – ahead of expectations. Retail sales activity also beat expectations, up 17.4 per cent over the year.
• Inflation prints above forecast. China’s annual inflation rate rose from 4.9 per cent to 5.4 per cent in March – a 32-month high. Food inflation stands at 11.7 per cent with non-food inflation at 2.7 per cent.
• Business inflation (producer prices) remained high at 7.3 per cent in March – a 30 month high.

What does it all mean?

• Chinese authorities have been active in tightening monetary policy over the past six months. And while some parts of the economy have responded, it will take time for the full impact to be seen. Overall, however, economic growth has eased from 11.9 per cent down to 9.7 per cent. And production and retail spending have also eased. But further tightening measures are likely in coming months with inflation still too high for comfort.
• The Chinese economy continues to experience a soft-landing, but the ongoing concern remains inflation. The annual inflation rate printed above forecasts in March, up 5.4 per cent on a year earlier and now holding at a 32 month high. In addition producer prices also rose over the month and the year, keeping inflation prominently in the centre of the radar screen. Still it is important to point out that non-food inflation stands at just 2.7 per cent. Most central banks would be happy with that result with an economy growing at a near 10 per cent annual rate.
• Looking forward further restrictive policy measures are likely in the near term. While inflation is driven by higher food prices, authorities can’t take risks that it won’t feed through to other goods and services. And while equity markets may react adversely to a slowdown in activity levels, the recent round of data seems to suggest that growth going forward will be healthy and more importantly sustainable. Keep in mind that if the economy slows too quickly authorities have ample tools available to turn on the stimulus tap.
• Chinese authorities seem to be having a degree of success in paring back activity. Annual growth rates for industrial production and investment were only slightly above market expectations. And while retail sales were firmer, growth was at 5-year lows in February.

What do the figures show?

• The Chinese economy grew at a 9.7 per cent annual rate in the March quarter (consensus 9.4 per cent) down from 9.8 per cent in the previous quarter. In constant price terms the Chinese economy grew at 2.1 per cent in the March quarter compared with the December quarter.
• The annual rate of consumer price inflation rose from 4.9 per cent to 5.4 per cent in March. The March result was above forecasts centered on a result near 5.2 per cent.
• Food prices rose by 11.7 per cent over the year to March (11.0 per cent in February) while non-food prices rose by just 2.7 per cent (2.3 per cent in February). Over the first quarter of 2011, food prices rose by 11.0 per cent while non-food prices rose by 2.5 per cent.
• Producer prices (business inflation) rose by 0.6 per cent in March to stand 7.3 per cent higher than a year ago. The annual rate of producer price inflation was a 30-month high, up from 7.2 per cent in February and higher than economist forecasts of 7.2 per cent. Prices of raw materials rose by 10.5 per cent, with mining up 16.8 per cent, processing up 6.4 per cent.
• Industrial output expanded at a 14.8 per cent annual pace in March, ahead of forecasts centred 14.0 per cent. Production is still 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 25.0 per cent annual pace in March, ahead of consensus forecasts (24.8 per cent).

• Retail sales grew at 17.4 per cent annual rate in March. The result was well above forecasts centred on 16.5 per cent annual growth. Strongest growth was on jewellery (up 52.4 per cent), followed by petroleum (up 43.8 per cent) and furniture (31.9 per cent).
• Real estate investment remains strong. In the year to the March quarter investment grew by 34.1 per cent with residential investment up by 37.4 per cent. Retail estate sales rose by 27.3 per cent while residential sales grew by 25.9 per cent.

Data released earlier in the month showed

• China’s recorded a modest trade surplus in March. The trade balance rose from a deficit of US$7.3 billion to a surplus of US$0.14 billion and was well ahead of forecasts centred on a deficit of US$3.35 billion. Exports were up 35.8 per cent on a year ago (consensus +23.4 per cent) and imports were up 27.3 per cent (consensus +20.6 per cent).
• Chinese passenger car sales rose by 6.5 per cent to 1,347,600 in the year to March after hitting two year lows in the prior month. Authorities have continued to tighten up on the issuance of license-plate registrations to ease congestion and pollution in cities. Total vehicle sales rose by 5.4 per cent to 1.83 million in March compared with a year ago.

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 16^th 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?

• Inflation still remains uncomfortably high in China, meaning that further tightening measures will be required. Aussie investors will need to carefully monitor the situation. The risk is that authorities may need to apply more aggressive tightening – clearly negative for Australia’s resources sector.
• However if China did pick up the pace of monetary tightening, that could actually serve to keep Australia’s Reserve Bank on the policy sidelines for longer. Clearly an exacerbated slowdown of the Chinese economy would be negative for our economy.