China Weekly 08.16

CHINA WEEKLY

The data came thick and fast last week out of China as it leapt ahead of Japan to become the world’s second largest economy behind the USA. Trade data is first up which saw China’s trade surplus widen in July to $28.7 billion from June’s $20.02 billion, beating forecasts handily. July’s monthly surplus, the biggest since January 2009, brought China’s cumulative surplus for the first seven months of the year to $83.93 billion. The larger than expected expansion was due to surging exports, which rose 38.1% to $145.5 billion, while imports grew at a more moderate 22.7% to $116.8 billion. The softer looking import figures do not indicate underlying weakness in China’s domestic demand, but rather the domestic economy is recovering at a milder pace, export strength, however, reflects an ongoing recovery in global demand as the recovery gathers momentum. It is our opinion that another bumper trade surplus will serve to heap further pressure on Beijing to allow the yuan to float more freely and appreciate at a faster pace in coming months. Exports to the EU also showed impressive strength in July, up 38.3% from a year earlier, and up 5.4% from June’s levels. We have mentioned here in recent months that weakness in EU demand for exports amid its debt crisis could have weighed heavily on Chinese surplus readings since exports to the EU make up around 30% of China’s exports. However, as we have seen, EU demand has bounced back helping to bolster China’s trade surplus, allaying concerns that the EMU debt crisis would cause problems for China.

Next up was growth data, which showed growth is easing from the fast pace set at the start of the year but points more to a moderate slowdown rather than a sharp downturn. The producer-price-index (PPI) for July was 4.8% higher than a year earlier, easing from June’s 6.4% rise. The consumer-price-index (CPI) accelerated to 3.3% from June’s 2.9% but the jump was largely attributed to the one off jump in prices after widespread flooding. We believe that the spike in CPI to a 21-month high is no cause for alarm since authorities are likely to dismiss the data as tied to food-price rises after severe floods that have affected large parts of the country. While the rise in CPI breached the PBoC’s upper limit of the 3% target band, the inflation won’t necessarily result in the policy tightening.

Other data released last week also points to a cooling trend in China’s economy. Industrial output for the month of July was up 13.4% year-on-year, below June’s 13.7% increase. Retail sales rose 17.9% year-on-year, slowing from June’s 18.3% rise and well below forecasts for an 18.4% gain. We maintain our position that this data points to a soft landing being successfully engineered rather than a significant slowdown in growth.

A study conducted by Credit Suisse has indicated that Chinese households enjoy much more spending power than indicated by official government estimates. Disposable income among urban households averaged 32,150 yuan in 2008, about 90% above the 16,880 yuan suggested in official data. The study found that ‘hidden’ household disposable incomes, i.e. the difference between government estimates and those found by the study, could be as high as 9.3 trillion yuan in 2008, about 30% of China’s GDP.

Separate studies conducted by Nomura and Bank of America Merrill Lynch tipped airlines across Greater China for strong second-half earnings across the sector and suggested results in some metrics could hit new records. Analysts at Nomura cited Asian economies recovering much faster than the US and Europe, suggesting air travel has recovered at an equally fast pace which is backed up by data showing a 53% rise in first-half passenger traffic compared to a year earlier. Analysts at both banks said that cargo was their only major concern in the sector, saying growth may have peaked in May.

Written by Jonathan Granby, DailyFX Research Team

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