China: Economy Improving
China released a raft of macroeconomic data today all of which point to accelerating growth and low inflation. Positive news out of China should translate into good news for the global economy, particularly in Asia. Global commodity prices may begin to rebound if the positive data reported today is the start of a trend.
The most widely-followed data point is industrial output. China's National Bureau of Statistics said that industrial production rose 9.6 percent year-on-year in October, beating the average analyst estimate of 9.4 percent.
According to Bloomberg, “Today's reports may offer some comfort to China's leaders who are meeting in Beijing this week for a once-a-decade power transition and pledged yesterday to double per-capita income in the 10 years through 2020.” Bloomberg continued, “The pause in monetary easing since July may persist as data increasingly show the economy recovering from a seven-quarter slowdown.”
The other feel-good data point out today was the consumer price index (CPI), which was up only 1.7 percent, below the average analyst forecast of 1.9 percent. Andy Rothman, China Macro Strategist for CLSA Asia-Pacific Markets wrote, “With CPI up only 1.7%YoY in October, down from 1.9% in September and the slowest pace in more than two years, inflation is clearly not a policy constraint in China.”
Rothman also points out that the decline in industrial input prices was only 1.7 percent year-on-year in October compared to a 4.1 percent decline in September. “We are starting to see a bit of a bump up in both input and output prices,” Rothman continued, “which is consistent with our view that the growth rate of industrial inventory levels has slowed and a modest macro recovery is underway.”
If Rothman is correct, this could be positive for the price of a host of industrial commodities including copper, iron ore, coal, aluminum, and steel scrap, which have all been weaker due to the slowdown in Chinese industrial production over the summer.
The National Congress of the Communist Party of China, now under way in Beijing, also marks the start of new 5-year economic plans. Once these policies are put into effect, it should add to the economic recovery already evident in today's data.
“We believe that China's fiscal policy will be more active after the leadership transition this month,” said ANZ economists Li-Gang Liu and Hao Zhou cited by The Wall Street Journal. “Many long-term infrastructure projects will start soon as well. We see further upside in China's heavy industry in the following months, suggesting that China's commodity demand will continue to increase, thus supporting global commodity prices.”
The Wall Street Journal also cited Goldman Sachs/Gaohua China economist Yu Song who wrote, “The year-end CPI level is most likely to remain well below the 3% level that was expected by most, including monetary authorities, at the middle of this year.” Song continued, “Lower-than-expected inflation trajectory tends to leave more space for policy makers to [loosen] policy. However, we are not expecting any major further loosening measures to be rolled out in the near term because the rebound in activity growth should alleviate the urgency policy makers need to do so.”
Official data from China is often viewed with suspicion by economists because it is compiled and released so quickly following the end of the period under review. That might have been valid a couple of decades ago when China was much more of a command economy than it is today. But CLSA's Rothman offers confirmation from an objective source outside the government. “The official data we've been discussing is supported by independent research by CLSA's China Reality Research team, which found that conditions for private firms, the backbone of the economy, improved in 3Q.”
“CRR's unique quarterly survey of privately-owned SMEs found QoQ improvement across a wide range of metrics,” Rothman said. “The value of new orders, utilization rates, hours worked, operating margins and capex all strengthened QoQ. Even access to credit improved, with only 26% of firms reporting that bank loans were harder to obtain compared to a year ago, down from 39% in 2Q and 76% in 3Q11.”
With the outlook for growth in China improving, economic prospects elsewhere in Asia should start to turn positive by year-end. This should be positive for the iShares FTSE/Xinhua China 25 Index ETF (NYSE: FXI), which has been sold off over the past few days.
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