Economists digest China data on overcapacity and trade

Emerging Markets, EBRD editions, May 10 2013

Economists are digesting the latest round of China data, with two themes dominating: overcapacity, and the reliability or otherwise of Chinese trade numbers.

Yesterday China released inflation numbers, with headline CPI increasing to 2.4% year on year in April, up from a brief dip to 2.1% in March, and PPI declining to a six month low of minus 2.6% year on year, down from minus 1.9% a month earlier.

The CPI number, nudged slightly higher by vegetable prices due to bad weather, was largely ignored by economists. “Overall inflation is benign,” said Sun Junwei, China economist at HSBC. The decline in producer prices into deflation garnered more attention. “PPI’s sharper contraction continues to point to soft underlying demand and excess industrial capacity,” he said.

This is arguably the more significant point since weak domestic demand and excess capacity appear to suggest sluggish growth, which would ordinarily lead to the People’s Bank of China adopting monetary easing to help the economy. But with inflation rising, albeit modestly, that option does not appear to be open to the central bank. PBOC yesterday announced the issuance of RMB10 billion in central bank bills, the first time in 17 months the central bank had issued bills to withdraw liquidity from the open market, but economists said this was not significant in terms of broader monetary policy.

“We maintain our view that the PBoC will maintain its neutral monetary stance, while continuing to use its open-market cannons to manage the aggregate liquidity level,” Dong Tao, research analyst at Credit Suisse, said in a note to clients.

The inflation numbers followed trade data the previous day which showed Chinese exports grew by 14.7% year on year in April, far higher than had been expected (Bloomberg consensus had been 9.2%), although lower than imports at 16.82%. The disparity, while welcomed by the market, raised eyebrows; Dong Tao told clients: “China’s export growth continued to deliver surprisingly high scores in recent month: this is puzzling to us.” And UBS economist Tao Wang said: “China’s exports data in the past few months, especially in Q1 2013, overstated the true strength of exports. This does not seem to have gotten much better in April.”

CEIC Data said it had received a “huge amount” of queries about China’s export and import growth data, to the extent that it sent out two separate sets of underlying trade data, excluding warehousing and logistics goods, in order to reassure the market that the numbers were credible. The company’s relationship manager Kristopher Leung told clients in conclusion that “China’s April trade data is not [as] doubtful as many suggested.”

UBS’s Tao said he thought that new measures from China’s State Administration of Foreign Exchange should help to curb speculative capital flows disguised under current account transactions, which ought to mean export data more accurately reflects fundamentals. With that done, he said, “in the absence of any major negative shocks, the gradual, though bumpy, recovery in global demand should be able to support a steady growth of China exports at around 10% in the coming year.”

China’s economy grew at 7.8% last year, its slowest rate since 1999. Investment industrial output and retail sales numbers for April will be published on Monday.