Market Overview

Chinese Inflation, Industrial Production Fall in July

Chinese Inflation, Industrial Production Fall in July

New data released late Wednesday and early Thursday from China pointed to a continued slowdown in the Chinese economy. Inflation slowed, industrial production fell and retail sales missed estimates pointing to a protracted slowdown in what is supposed to be the growth hub of the world.

Industrial production is looked at as a leading indicator for growth in China, as it is a broad measure of manufacturing output and China's manufacturing sector is very large. Industrial production rose at a 9.2 percent annualized rate in July, well below the 9.5 percent rate seen in June and also missing economist estimates of a 9.8 percent rate of growth. Economists had been predicting an increase in industrial production hoping for a rebound in the economy following stimulus measures from the People's Bank of China (PBOC).

Inflation also slowed in China in July, which may hint to investors that the PBOC is set to ease further to stimulate growth. CPI inflation rose 0.1 percent in July from June, or at a 1.8 percent annualized rate. The CPI data beat expectations of a 1.7 percent rate of annualized inflation, however it was well below the 2.2 percent rate seen in June. Also, producer prices slowed in July, as PPI inflation fell 2.9 percent at an annualized rate in July, missing estimates of 2.5 percent drop and below the 2.1 percent rate of deflation seen in June.

Lastly, retail sales slowed in July despite efforts by the PBOC to cut consumer borrowing rates in hopes of spurring consumer credit growth. Retail sales grew at a 13.1 percent annualized rate in July, below the 13.7 percent rate expected by economists. Economists were expecting a flat reading from June's reading of 13.7 percent growth in retail sales. Fixed asset investment also fell in July, falling to a 20.4 percent annualized rate from the 20.5 percent rate seen in June. The measure of the change in total spending on non-rural capital investments such as factories, roads, power grids, and property shows that companies have been reluctant to invest in hard assets despite efforts from the PBOC to cut borrowing rates.

The data points to a continued slowdown in China, as the Eurozone recession crimps global trade and weighs on Chinese exports. However, this data points to the domestic economy, not just the export economy, has been affected by the global slowdown. Hopes had risen over the past few weeks that easing efforts from the PBOC would be enough to create a bottom in China's economy. However, the continued decline in these leading indicators of GDP growth point to an increased likelihood of easing measures.

Economists at Credit Suisse expect at least two more rate cuts in 2012 and potentially further easing measures in 2013 once the leadership change occurs. The lack of investment demand seen by the fall in fixed asset investment is worrisome, as it points to the fact that rate cuts may not be working to increase demand. The economists at Credit Suisse believe that investment, "cannot be boosted with monetary easing policies, in our view, but with more structural reforms in liberalizing the banking system and allowing more private investments into profitable economic sectors."

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