Over the weekend we got the Chinese data dump for February. It shows a weak recovery and suggests that so far the only rebalancing that has taken place is that things are getting worse less swiftly. First, the details (charts courtesy of ANZ & NAB):
- Industrial production moderated to 9.9% y/y in January-February, from 10.3% in December, and lower than market expectations of 10.6%.
- Fixed asset investment accelerated to 21.2% y/y, compared with 20.6% in the full year of 2012 and consensus of 20.8%.
- Retail sales unexpectedly slowed to 12.3% y/y, 2% lower than December’s reading and miles below consensus.
- CPI inflation accelerated to 3.2% y/y in February, from 2.0% in January, higher than market consensus of a 3.0% increase. PPI declined by 1.6% y/y in February, flat from the previous month and 0.1ppt lower than market expectations. the PPI increased by 0.2% m/m.
That’s hardly a consumer-led boom. The internals are all about a heavy industrial recovery:
But even here, pricing power is only slowly returning, illustrating fairly isolated strength:
Which is confirmed by flat-lining electricity production growth:
Retail has very much lost momentum:
But slower consumer growth is not preventing a rebound in the CPI, largely food driven (and seasonal):
What do we make of all of this? First, I’ll reiterate my caution that all of these numbers are Chinese New Year affected so should be judged cautiously.
With that caveat in mind I would say:
- this is a mini-me 2009 recovery
- it has almost no rebalancing in it beyond limiting the amount of stimulus spending and has all of the hallmarks of a modest can-kick by an outgoing regime
- real rebalancing looks very hard. The moment the Chinese suppress fixed-asset investment growth the economy falters and so far the only way to pick it up again is more of the former
- the good news is that China looks serious about preventing another property blowoff so the imbalances will get worse more slowly. But China needs a paradigm shifting structural change that radically boosts spending over savings if it is to avoid much slower growth.
There is nothing here to shift my current base case that in the second half China will slow and face the same questions it did last year about whether and how much to stimulate. Look at the chart showing where the heavy industry recovery is coming from and it’s as clear as daylight:
Given the recent commitment to sustain fixed-asset investment growth at 18%, the Chinese will no doubt kick the can again, but this figure also suggests each subsequent kick will be on a smaller scale. We appear to be in for a series a step-down stimulus efforts as consumer-directed reform steps up.
So, the good news is the that Chinese demand will undergo a series of step-down shocks rather than one big one. The bad news is that the Chinese may or may or may not be able to manage this transition in an orderly fashion. If low interest rates keeps the flow of credit to infrastructure investment solvent but high interest rates are pre-requisite for increasing household income and consumption then at some point the two goals may become internecine. Either way, Australia commodity supply will rise into the decline.
