China has a good month

Over the last few days, we’ve had an avalanche of Chinese data for August and the results were solid.

First off, urban fixed asset investment for Jan-August 2010 increased by 25% compared to the same period a year ago, slightly lower than expectation of 25.5%.  Of which, fixed asset investment from state-owned enterprises increased by 12.1% compared to the same period a year ago, and real estate investment increased by 33.2% compared to the same period of last year.

For August alone, fixed asset investment increased by 1.16% compared to July:

Industrial production for August increased by 13.5% compared to a year ago, slightly slower than 14.0% growth in July, and lower than the consensus of 13.7% growth:

Retail sales for August increased by 17.0% over a year ago, declined slightly from 17.2% growth in July, and in-line with the consensus:

On the whole, these numbers show that the economy is still robust for the time being.

Also contributing to the positive month was the external position for the month. The General Administration of Custom of China published the latest set of trade figures.  Trade surplus for August decreased 44% from US$31.5 billion in June to US$17.5 billion vs. consensus of US$24.1 billion.  On an year-on-year basis, the surplus decreased by 10.9%.

Exports jumped 24.5% from a year earlier to US$173.3 billion vs. market expectation of a 21.0% rise, while imports increased by 27.5% from a year earlier to US$155.6 billion vs. market expectation of a 21.0% rise.  On a seasonally adjusted basis, exports grew by 20.7% yoy, while imports grew by 25.1% yoy.  On a month-on-month basis, exports decreased by 1.0%, while imports increased by 8.3%.

Both import and export growth increased more than expected on an year-on-year basis, yet imports growth on a month-on-month basis is certainly more impressive.  As always, I don’t usually read too much into one-month of data, but in this respect, it suggests that the economy is still robust for the time being.  On the export side, however, even though we have a stronger than expected annual growth rate, export is down on a month-on-month basis.  We do know that external demand might have been weakening due to the slowdown in the developed countries, and we have had a sub-50 new export order index within the PMI, indicating contraction of exports demand.  Taken as a whole, I believe it is more of a mixed picture.

Finally, the People’s Bank of China published the latest set of monetary statistics, which paints a somewhat mixed picture.

M2 Money supply grew by 13.5% compared to a year earlier to RMB78.07 trillion, lower than expected growth of 14.2%.  Money supply growth has fallen further below the pre-crisis average level of about 16.76%, and is still falling apparently.  M1 Money supply grew by 11.2% yoy to RMB27.33 trillion, and currency in circulation grew by 14.7%.

New Chinese yuan loans in July amounted to RMB548.5 billion, which is above expectation of RMB500 billion, and well above the RMB 492.6 billion of new loans in July.  Total deposits in July amounted to RMB80.31 trillion, increased by 13.3% compared to a year ago.  Chinese yuan deposits amounted to RMB78.67 trillion, rising 15.5% compared to a year ago:

The surprise on the downside is that money supply growth continues to fall, and it is now well below the average growth even before the uber-expansion of money and credit after the financial crisis. Of course, this is still a pretty rapid expansion on an year-on-year basis, but at least my view is that in terms of money supply, the central bank is headed in the right direction.  I hope that the money supply growth continues to slow to low double-digit or high single-digit.  Of course, monetary policy will not transmit into price levels immediately, and slowing monetary growth will only have a meaningful impact on prices after 6-12 months.  At this point, I still maintain that inflation remains high, such that there is no reason to ease policy.