Phat dragon

12 March 2012

a weekly chronicle of the Chinese economy

Phat Dragons quick summary of the flurry of new information

on growth and prices that became available between brunch on Friday and the cocktail hour Saturday is as follows: Inflation is falling, industry is under pressure, exports are lagging, investment decelerating, housing turnover is weak, consumption has taken a step down and policy is not yet turning swiftly enough.
15 10 5 0

Various measures of inflation

%yr
Sources: CEIC, Westpac Economics.

%yr

15 10 5 0

On inflation, Phat Dragons has never shared the

administrations concerns that inflation would remain a threat deep into 2012. The widening of the output gap in the second half of 2011 and a low probability that food prices can maintain the rage both argue that CPI should look increasingly benign in the remainder of the year. February saw a 0.1% fall in the month, pushing the annual rate down to 3.2% from 4.5%yr in January. The PPI continued its decelerating trend in February. It is now flat on a year ago and should go negative next month. The official target of around 4% for the calendar year looks ultra conservative.

Non-food CPI Fixed investment price index

-5 -10 Mar-04

Consumer price index GDP implicit price deflator Producer price index

February actual for series available monthly

-5 -10

Sep-05

Mar-07

Sep-08

Mar-10

Sep-11

On investment, Phat Dragon notes that the 21.5% nominal

growth rate reported for Jan-Feb is the weakest beginning to a calendar year in the history of the series, dating back to 2004. On the broadest sectoral split, tertiary industry slowed to 18.5% (weighed down principally by transport, especially railways but real estates contribution is also slowing) and 24.9% for secondary industry. Some of the bellwether heavy industrial sectors have come off quite a bit from their December rates: ferrous metals smelting are now at just 3.2%ytd from 14.6% prior, non-ferrous are at 19.1%ytd from 36.4% prior, non-metal minerals are also at 19.1%ytd from 31.8% prior. Note that the acceleration in heavy industrial investment through 2011 was the main surprise relative to expectations over the course of the year. Another key moving part is utilities, where capex is yet to accelerate meaningfully despite the fact it is getting increasing policy focus. Phat Dragons 2012 forecasts are based on a rebound in utilities, a significant deceleration in heavy industry and real estate and a continuation of weak transport outlays.
36 34 32 30 28 26 24 22 20

The development of the investment cycle

%ytd
2007
Sources: Westpac, CEIC. * Jan/Feb average

%ytd
2008 2009 2010 2011 2012

36 34 32 30 28 26 24 22 20

Feb* Mar Apr May Jun

Jul Aug Sep Oct Nov Dec

New bank credit flows

2000 1600 1200 800 400 0 -400 Jan 09 RMBbn
Household Medium and long term loans Other short term Bills Total

On housing, commercial sales volumes fell to 14%yr in Jan-Feb;

starts slowed to 5.1%yr while completions jumped to 45.2%. Phat Dragon ventures that there is enough misalignment there to keep an army of chiropractors busy from here until Judgement Day. On trade, the anticipated bounce in February exports under-whelmed, while imports were actually quite robust on the surface. Phat Dragon approaches the import read with a good deal of scepticism. What is clear though is that net exports will detract from growth in Q1, which puts a ceiling on the achievable outcomes for the March quarter GDP print.

RMBbn

2000 1600 1200 800 400 0 -400

On credit, February new loans were 710 billion yuan, for a year to

Jan 10

Jan 11

Jan 12

date total of 1448 billion, down 8%ytd from 2011. Phat Dragon has been labouring the point that February needed to be large to offset the miserly January disbursement (40% on Jan 2011). The February figure falls into a range of ambiguity - not large enough to allay all fears, not small enough to crystallise them fully. The RRR cut of late February should underpin lending in March, so the credit ship may be on the the way to righting itself, particularly
Economic Research

if the evolving inflation story changes the advice being delivered behind closed doors.

Stats of the week: A survey has put 48k pa as the

economics@westpac.com.au www.westpac.com.au

minimum wage for a Chinese bachelor to be marriageable.

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