Although China has secured its place as the world's second largest economy in 2010 with solid double-digit growth, inflationary concerns remain ever-present, despite the slight pull-back in December's CPI.
IHS Global Insight Perspective
Significance: As China enters 2011 with strong growth
prospects under its belt, policy-makers have shifted their focus to combating
inflationary pressure and pushing through the reforms necessary to enable
sustainable growth through the 12th Five-Year Plan period.
Implications: Beijing has got a liquidity battle on its
hands, with strong credit growth and a fast-expanding money supply exerting
pressure on consumer prices and asset markets. This is the issue to watch for
2011.
Outlook: IHS Global Insight's growth outlook remains
strong, with GDP projected at 9.5% for 2011, on the back of improved U.S.
prospects and renewed domestic demand momentum. A vastly expanded money supply
means that growth could very well surprise on the upside.
Growth Slowdown Moderates Through Q4 2010, Bringing
Full-Year to 10.3%
China has scored another year of scorching growth in
2010, recording 9.6% year-on-year (y/y) in the final quarter bringing full-year
growth to 10.3% y/y, according to data from the National Bureau of Statistics
(NBS). As well as quite probably being China's last year of double-digit
growth, 2010 was the year that China's economic structure settled back to an
appearance of its pre-crisis "normality", as growth gained support
from the export sector once again and investment spending slowed somewhat. It
was also the year that China overtook Japan to become the world's second
largest economy, at 39.8 trillion yuan. As opposed to a year previously, growth
stabilisation has now fully given way to structural issues and inflationary
pressures as the prime focus of economic policy-making.
Industrial production, a coincident indicator of overall
economic activity, rose 13.5% y/y in December to bring the full-year to 15.7%
y/y, largely in line with a soft-landing scenario. For 2010, heavy industry
kept gains ahead of light industry—despite government restrictions on
energy-intensive firms through the end of the 11th Five-Year Plan period—rising
16.5% y/y, in contrast to light industry's 13.6% y/y. In terms of geographical
spread, coastal China saw industrial production grow 14.9% y/y for the year,
with the west growing at 15.5% y/y and the centre pulling ahead, at 18.4% y/y.
Urban fixed asset investment came in at 24.5%
for the year, with the mild slowdown through the year highlighting the retreat
of investment spending through 2010 that accompanied the winding-down of the
November 2008 fiscal stimulus. Fixed asset investment in rural areas rose 19.7%
y/y. Despite the second round of administrative measures in October that have
softened—but not slashed—price gains in the property market (see
below), real estate investment has remained resilient. Full-year
investment in property grew 33.2% on the year to 4.8 trillion yuan, a
remarkable 20% of urban fixed asset investment. Support was provided by the
characteristically steady retail sales, a rough proxy for household consumption,
which gained 19.1% for the year.
In terms of China's external sector, data released
earlier in the month showed a rather dramatic pull-back in December's foreign
trade. Export growth slowed to 17.6% y/y, the slowest pace of expansion through
2010 and almost half of November's 34.9% y/y expansion. Import growth also
decelerated sharply to 25.6% y/y, down from 37.7% y/y in November. This shrunk
the trade surplus to an eight-month low of US$13.08 billion, a handy occurrence
given President Hu's current trip to the United States.
Trade volumes in 2010 recovered from 2009's poor showing,
exceeding pre-crisis levels. For the full-year 2010, China's foreign trade
totalled US$2.97 trillion, up by 34.7% from 2009. Exports surged 31.3% and
imports soared 38.7% y/y, while the trade surplus dropped 6.4% on the year to
stand at US$183.1 billion. Electrical and machinery goods still dominated the
country's trade in 2010, with the exports of such goods soaring 30.9% on the
year to hit US$933.4 billion—nearly 60% of China's total exports—and such
imports surging 34.4% y/y to stand at US$660.3 billion, 47% of the total.
Rampant Liquidity…
The deluge of liquidity that has flooded into
the economy over the past year continues almost unabated. Full-year bank lending
reached 7.95 trillion yuan, well past the 7.5-trillion target set by
regulators. This is down from 2009's remarkable 9.6 trillion yuan, but given
that 2009 was almost double the 4.9 trillion seen in 2008, this is hardly a
case of severe monetary tightening, despite movement on interest rates and
reserve ratio requirements. Indeed, with such runaway liquidity, it is easy to
see how China has achieved another year of double-digit growth.
Banks bumped up against their full-year quotas in
December, then sailed past them, lending 480.7 billion yuan, up over 100
billion yuan on December 2009. M2, the broad money supply, continued its strong
growth in unison, climbing 19.7% y/y in December, up 0.2 percentage points on
the month previously, though down 8 percentage points on the year before.
Worryingly, market rumours suggest that—with quotas renewed—banks lent over 500
billion yuan in the first week of January alone, drawing warnings from the
regulators that the month's total should not exceed 12% of the full-year
figure, thought to be at 7.2-7.5 trillion yuan. As always, it looks unlikely
this target will be met.
…Is Driving Inflationary Pressure
As largely expected, inflation blasted through
the government's full-year 3% target in 2010, with the consumer price index
(CPI) coming in at 3.3% y/y. Public hype surrounding China's inflation problem
will temporarily subside, given that December's consumer prices rose 4.6% y/y.
This was down from the 5.1% y/y growth in November, which was driven by 11.1%
y/y gains in food prices. However, with direct government intervention in food
prices—Carrefour, for example, was reportedly ordered to give officials two
days' notice before raising vegetable prices—and a more favourable base effect,
it is hardly surprising that food prices have subsided, smoothing the overall
CPI number. Food prices gained 9.6% y/y in December, down from the 11.7% y/y
clocked in November. That said, the trend behind non-food CPI is
still looking troubling, growing at 2.1% y/y in December, up from November's
1.9%. Meanwhile, prices at the factory gate, the producer price index (PPI),
have also seen some moderation, rising 5.9% y/y in December, down from
November's 6.1% y/y, for a full-year rate of 5.5% y/y.
Whilst the real estate market continues to pull
back in y/y terms, to growth of 6.4% in December, down from 7.7% in November
and 8.6% y/y in September, month-on-month (m/m) gains demonstrate the
still-strong upward pressure in the market. Prices were up 0.3% m/m in
December, marking the fourth straight month of sequential gain. As usual, the
national rate masked divergent regional trends. Sanya, in Hainan province, saw
y/y price gains of 43% in December, whilst Guangzhou, in Guangdong, saw gains
of just 0.4% y/y. The underlying drivers of the property market boom remain
unchanged, despite the two rounds of aggressive administrative tightening.
Strong credit creation over the last two years, not to mention rampant
off-balance-sheet lending, is pushing liquidity into the market. The two rounds
of measures have softened, rather than reined in, the market. Continued price
gains heighten the chance of a third round of administrative measures, as
authorities struggle to keep price gains below income growth and remain fearful
of the impact of a fully fledged property tax or significant interest rate
rises.
Outlook and Implications
The economy sails into 2011 with renewed domestic demand
strength, with measured tightening having limited impact. A new wave of credit
expansion is driving inflationary pressure, in both consumer prices and asset
markets, with a reacceleration in construction and fixed investment. Despite
December's slight retreat in CPI, the demand side of the inflationary picture
remains unchanged, as evidenced by creeping non-food inflation. In short,
tightening has been timid, in effect doubling-down on the liquidity-driven
investment-heavy growth model from which policymakers are, at least
rhetorically, attempting to shift away.
IHS Global Insight expects the government to continue
with its measured tightening stance through this year, reflecting the change to
a "prudent" monetary policy. We expect two benchmark interest rate
rises—possibly more—in 2011, in combination with more reserve ratio requirement
(RRR) tinkering and direct credit controls. That said, to date, RRR increases
have not brought credit growth down, neither have tentative moves on interest
rates, as inflation outpaces the 50-basis-point increase we have seen during
the last four months and rate levels remain severely suppressed. Although there
have been announcements pointing to a break from the traditional full-year loan
quota system, it remains unclear whether this change will actually take place.
In fact, as rumours emerged that January's first-week lending had surged,
regulators were reported to fall back on quota allocations, demanding banks
stick to 12% of a full-year amount for the month.
Although inflationary pressures in non-food consumer
prices and asset markets are to be watched, they are not at dangerous levels
yet. Should rampant liquidity drive inflationary pressure still higher, the
policy dilemma facing the government will merely intensify. Interest rate hikes
are widening the differential between the United States and China, at a time
when the renminbi continues its crawling peg against the U.S. dollar, causing
increasing pressure from inflows seeking the carry trade and one-way currency
bet. In this respect, raising interest rates to slow the economy could have the
opposite effect, in addition to increasing distress to balance sheets at the
local government level and punishing mortgage holders. Moreover, if further
asymmetric rate rises (squeezing net interest margins at the longer-end,
retaining them at the shorter-end) succeed in drawing cash away from the
property sector and back into deposit accounts, bank reserves will build and
credit creation could grow, as banks feed to interest rate-insensitive SOEs,
compounding efforts to reel in liquidity.
An improved outlook in the United States will provide
additional support to China's external sector going forward, allowing a
slightly faster renminbi appreciation schedule. IHS Global Insight expects an
appreciation of 5-6% in 2011, against the U.S. dollar. It should be noted that
a 5-6% nominal appreciation, in combination with the significant difference
between U.S. and Chinese inflation rates, means that the renminbi is
appreciating relatively quickly in real terms. Our growth outlook remains
strong, with GDP projected at 9.5% for 2011, on the back of the U.S. outlook
and renewed domestic demand momentum. A vastly expanded money supply means that
growth could very well surprise on the upside. As such, the risk of a
sharper-than-expected growth deceleration after 2011 increases, as inflationary
pressures and rampant credit creation take their toll.
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29/07/2009| |
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28/03/2009| |
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24/12/2008| |
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27/11/2008| |
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03/10/2008| |
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29/12/2006| |
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