July’s monthly economic indicators now starting to be published show clearly that the hoped-for bottoming of China’s growth slowdown has yet to materialize. Both industrial output and retail sales growth slowed in the month, to 9.2% from 9.5% and to 13.1% from 13.7% respectively. That will add to the pressure on policymakers to increase the stimulative measures they have been taking. The fall in inflation to a 30-month low at 1.8% year-on-year gives them more headroom to do so.
Update: the unexpectedly slight 1% increase in exports in July is further evidence.
April’s consumer price inflation numbers released Friday follow weak trade and industrial production figures that all point to the slowdown in China’s economy continuing. The question is whether that slowdown is running to plan, or whether it is slowing more rapidly than the authorities would like, and thus requires a policy response to stimulate growth.
Outside commentators are leaning increasingly towards expecting that given the recent sets of monthly economic indicators, particularly those for inflation. The consumer price index (CPI) came in at 3.4% for April, down from March’s 3.6% and below the government’s 4% target for the third consecutive month. Yet, to this Bystander, the central bank’s warning earlier this week that inflation is falling but not yet stable suggests authorities will continue to be cautious about loosening monetary or fiscal policy.
The chain reaction that would cause a hard landing to the economy is a property bubble burst causing the local government debt bubble to burst, triggering a banking crisis, triggering a financial crisis, triggering an economic crisis, triggering a social crisis. Managing down the property bubble, as the first line of defense, has been the policy priority. It has has some success in lowering home prices and reining in speculative building. Year-to-date property investment, at 18.7% is down from 34% in the same period a year earlier. But that growth rate still shows how much more there is to do.
If that doesn’t provide policymakers with reason for caution, then the suicide bombing of a government office in Yunnan earlier this week over an allegedly uncompensated land seizure, unusually prominently reported if only the most dramatic of increasingly common violent protests over land evictions, provides them with a stark and tragic reminder of what lies at the other end of the chain if the property bubble isn’t let down in a controlled way.
This Bystander is less sanguine then some about the January inflation number. Much of the jump in the consumer price index (CPI) to 4.5% year-on-year from December’s 4.1%, reversing five months of decline, can be explained by seasonal factors, notably an early Lunar New Year. But there are some points of concern in the core numbers that bear keeping an eye on.
Non-food price inflation was up 1.8% Y-o-Y, higher than expected. We’ll have to wait for February’s numbers to better judge how much the rise in food prices, up 10.5% Y-o-Y, is attributable to the new year and how much to the return of a firming of global agricultural commodity prices. Shrinking acreage and rising demand for food is making China a larger and larger food importer. One month’s figures, especially from an abnormal month like January, don’t deflect us from our view that the trend is a decline in inflation, but we shall keep a weather eye on the rate of that decline to see if it moderates. The chart above, from the IMF, shows both the trend and the importance of food prices to the overall number.
The latest first-quarter growth forecast from an official source is 8.5%, announced today by the State Information Center, a government think tank. That is down from the 8.9% the center estimates for the fourth quarter and 9.2% for full-2011. Yet it is still a sufficiently brisk pace of growth, especially when taken with the January CPI numbers, for economic planners not to have to rush to further monetary easing.
These are uncertain times for the economy, with the IMF advising Beijing to stand ready with a ‘significant fiscal package’ in the event growth in the eurozone suddenly collapsed. Such spending would likely be just as inflationary as the stimulus that followed the 2008 global financial crisis.
Consumer prices rose by 5.4% in 2011, far ahead of the government’s target of 4%. But December’s monthly figure was down to 4.1% year-on-year, its slowest growth rate in 15 months, and well down from July’s 6.5% peak (via Xinhua). That suggests there is scope for China’s policy makers to continue priming the credit pumps, if cautiously. Next week’s GDP numbers are likely to show that growth has slowed to below 9% for the first time in ten quarters. Economists’ consensus is 8.7%; we think the number will come in a tad higher.
The conundrum for political leaders is food prices. They increased by 9.1% in December. Food prices are the component of the consumer price index least amenable to control by monetary policy while also being the most politically sensitive. Rising living costs are a ready cause of public dissatisfaction. Hitting the official inflation target is starting to look increasingly meaningless to Chinese consumers who don’t see the numbers aligning with what is left in their pockets.