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More Data Supports China Easing, Rate Cut

by Jim Trippon | 06-12-12

Many in the markets read China’s benchmark interest rate cut of last week as a signal that the upcoming release of May data would highlight further slowing in the economy. The National Bureau of Statistics released some of the May data on Saturday, June 9th, two days after the People’s Bank of China had cut the one year borrowing rate to 6.31 percent from 6.56 percent. In the economic statistics released after the rate cut, May factory output showed a year over year 9.6 percent increase, which disappointed observers. Forecasts had called for a 9.9 percent increase, though May’s figure was an increase from the 9.3 percent in April, which had marked a three-year low.

Source: tradingeconomics.com

Other data were similarly mixed. Fixed asset investment was up 20.1 percent in the five-month period measured this year, January through May. The increase also was larger than the forecast 20 percent. Fixed asset investment remains a significant portion of and driver of China’s economy. And while fixed investment growth edged higher than expectations, retail sales were disappointing. Growth in retail sales was 13.8 percent, less than the 14.3 percent expected and underneath the 14.1 figure from a year earlier. Consumer spending has been mixed in China during the economic slowdown. While appliance sales were drastically slowed due to the tightening of the housing market, auto sales were up by 22.6 percent year over year, with delivery of 1.28 million units, though this increase reflected the weak data from last May with the Japanese post-earthquake drop off.

Source: tradingeconomics.com

Inflation Falls

An important piece of data that wasn’t given as much play as the factory output and retail numbers, was China’s Consumer Price Index. This indicator for inflation fell to 3 percent, a nearly year-and-a-half low. The inflation indicator has steadily dropped since last July, when it reached its recent zenith of 6.5 percent. The 3 percent reading in May follows the 3.4 percent reading in April and the 3.6 percent reading in March. Beijing’s over-arching worries in the longer term have been taming inflation, so with the property sector cooled somewhat by interest rate increases back in 2010-2011, and the slowing growth from the spillover in Europe taking care of the rest, policy makers can at least take some satisfaction that momentarily, at least, inflation has been tamed. Thus China’s leadership has turned its attention more fully to firm up the policy easing measures already in place to halt the slide in growth.

China CPI/Inflation

Some Other Important Numbers

The Producer Price Index, or PPI, dropped 1.4 percent in May year-over-year, the third month in a row for a decline. The PPI, which reflects inflation’s effects at the wholesale pricing level, reflects the global slowdown in commodity prices. The PPI fell 0.7 percent in April and fell in March for the first time in over two-and-a-half years, since the effects of the global financial crisis worked their way through the PPI in 2009. Most observers feel the PPI tends to lead the inflation tracking, since the effects of pricing often show up first on the wholesale level, and that the PPI is signaling to China’s leaders that they must watch for a continuing drop in the related CPI in the months ahead. Thus the more vigorous easing with the interest rate cut.

More On The Numbers

According to a China Daily article, the expectation for the CPI was 3.1 or 3.2 percent, so inflation is falling faster than anticipated. Breaking down the CPI, one-third of which is accounted for by food prices, saw a food price increase of 6.4 percent compared to a 7 percent increase last month. Food and energy–notably fuel costs, are key consumer spending categories given the portion of consumer spending they account for. With lower global crude oil prices, the National Development and Reform Commission, or NDRC, cut the price of gasoline and diesel fuel for the second time in a month. One analyst predicted that with the lower fuel prices, inflation could fall below 2 percent, while most of the forecasts are still calling for an annual rate of around 3.2 percent, even with occasional dips below the 3 percent mark.

What’s Next?

Export numbers were expected to be reported which would simply confirm the trend of further slowing. China’s leadership is attempting to deal with the slowdown on several fronts, with analysts projecting that further reserve ratio requirement cuts may be in store for the big banks, as well as even another benchmark interest rate cut. The widening of availability of credit will be another stepped up goal, as will continuing the moving forward of infrastructure and construction projects. For those who’ve called for more dramatic moves on policy easing as well as wanting to this done with added speed, they’re certainly getting their wish.