Chinese data for the first two months of this year provide yet more evidence that China is in a hard landing. Our December CMI (China Momentum Indicator) update suggested the Chinese economy may soon be growing by as little as 3.9% – quite different from the official 2015 target of ‘around 7%’. The Chinese authorities have turned the monetary and fiscal taps back on. However, unlike 2008, it may be too little, too late. This time the weakness is home-grown.
Chinese New Year celebrations typically distort January and February data, as the fortnight of festivities varies in timing each year. We have had to be patient to get a snapshot of underlying activity in the Chinese economy at the beginning of 2015. Having reached a 24-year low in GDP growth in 2014, official data released this week suggest China has continued to slow during the first couple of months of this year. This corroborates the picture painted by our CMI. The latest reading for December 2014 put growth at 3.9%. We will be publishing a combined reading for the January – February period in early April. In the meantime, we can provide an overall assessment of the data released to date.
China’s real estate climate index fell to its lowest level since January 1998 in February to 93.77 – a level which the NBS describes as “low”. The current slowdown in this sector is a result of many years of overinvestment. In February, the quantity of vacant floor space in China had ballooned to 639.2 million square metres. This is almost 20 million square metres higher than two months earlier. This is despite the fact that the amount of floor space completed over the same period fell by 12.9%. The reason being that the amount of floor space sold in January and February, compared to the same period twelve months earlier fell by an even larger 16.3%.Real estate investment continues to outpace official GDP growth by a significant margin, and our own CMI-based estimate to an even greater extent.
Meanwhile, for all the much vaunted rebalancing of the economy, retail sales growth continues to slow – registering its lowest annual growth rate for nine years in February.
Instead reliance on export-led growth continues. The Chinese trade balance hit $60.6 billion in February – a record high. This was driven by a 48.3% increase in exports in January and February, on an annual basis. As the chart below shows, this was primarily due to a surge in demand from the US. Imports fell by 20% over the same period although this was driven by falling energy prices. According to historical Federal Reserve transcripts released last week, back in 2009 the Fed had concerns China would remain too reliant on recoveries in Europe and the US and try to export its way out of trouble. They were right to be worried.
‘Historically low inflation’ was cited as one of the primary reasons for the most recent interest rate cut. Producer prices have been in deflationary territory for three straight years now. The CPI rebounded in February with the highest one month rise since January 2012. However, this coincided with the Chinese ‘Spring festival’, which typically pushes up food prices. CPI inflation was slightly lower in February compared to December while non-food inflation stood at just 0.9% in February.
We anticipate more aggressive stimulus measures to be announced over the coming months as the authorities try to combat the rapid slowdown that is upon them. But while the yuan remains pegged to a rising dollar, they are unlikely to achieve much.
This research note is provided by Fathom Consulting. All of the charts below and many many more, covering a range of topics and countries on both the macroeconomy and financial markets are available in the Chartbook to Datastream users at www.datastream.com. Alternatively you can access Fathom’s Chartbook at www.fathom-consulting.com/TR.
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