Research Dept. News
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Monthly Report, num 338 - September 2010
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International review - China
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China: growth and moderation, the new Asian double act?
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China grows a solid 10.3% in the second quarter.
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China's GDP grew by 10.3% year-on-year in the second quarter of the year, lower than the 11.9% recorded for the previous quarter. China's growth confirms the strength in Asia, as well as hinting at certain signs of moderation starting to spread throughout the region. Inflation also seems to have eased its growth in most of the continent, with the clear exception of India. In spite of this slight slowdown, no drastic changes are expected in the monetary policies of the different central banks, which some months ago went back to more restrictive measures.
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Within this monetary context, the Chinese authorities have adopted several administrative measures to drain off excessive liquidity. In particular, restrictions on new bank lending, which in July stood at 535 billion renminbis, are far below the 774 billion in April and in line with the 7.5 trillion per year set by the central bank. This considerable drop in credit might postpone the expected actions on the interest rate, so widespread in the rest of the continent.
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On the other hand, while inflation slowed up in June to 2.9%, in July it picked up and stood at 3.3%. However, this was due to the sharp rise in food prices after the floods affecting the country. So all the evidence available seems to suggest that this rise will be temporary and that prices will continue the generalised trend to moderate, and we expect inflation to end the year at around 3%. Similarly, house prices rose by 10.3% in July, below the average of 12.2% in the second quarter so that, for the moment, the real estate sector seems to be in for a soft landing.
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Moderate upswing in July's inflation.
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Most of the business indicators for the months of June and July confirm the combination we mentioned at the start between strength and moderation. Concerning demand, investment in fixed assets was up 24.5% year-on-year in July, slightly below the average of 25.7% in the second quarter. Meanwhile, retail sales rose 14.1% year-on-year in July in real terms, also below the 15.1% of the second quarter.
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Among the leading indicators for supply, the purchasing managers' index (PMI) fell for the third consecutive month, reaching 51.2 points in July from the 55.7 points of April. On the other hand, July's industrial production grew 13.4% year-on-year, compared with 16% in the second quarter.
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Industrial production, retail sales and investment continue to grow, although at a slower pace.
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However, this moderation does not seem to have reached China's foreign sector which, totalling 28.7 billion dollars in July, posted the biggest trade surplus of the last 18 months. This was partly due to the slowdown in imports but especially because of strong exports which, with a 38.1% rise year-on-year, surpassed even the most optimistic forecasts and the record reached in July 2008. Once again, the size of the trade surplus and strong imbalance with the United States, around 25 billion dollars, was accompanied by a series of statements from the People's Bank of China repeating their commitment to allow the Chinese currency to appreciate more against the dollar. However, since it was announced at the end of June that the exchange rate would become more flexible, the renminbi has only appreciated a slight 0.4% against the US dollar.
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The foreign sector, immune to this moderation, posts its biggest surplus in 18 months.
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In short, China still enjoys solid growth, as well as seeming to avoid inflationary tensions and the risk of a bubble in the real estate sector. However, domestic consumption needs to play a greater role in order for the country's progress to become sustainable, something which is still not being observed, particularly compared with the vigorous foreign sector.
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