Bangkok--Feb 25--Aziam Burson-Marsteller
Lehman Brothers
Deciphering China's Industrial Output Underlying growth weakened in January, probably because of a further
slowdown in fixed-asset investment.
Do not be fooled by the reported sharp pick-up in China's industrial output growth to 20.9% y-o-y in January from 14.4% in December. The week-longlunar new year holidays fell in February this year, but in January last year, resulting in more working days in January 2005 than in January 2004.
This "lunar new year effect" has biased up the y-o-y growth rates of
China's industrial output, exports and imports in January.
The bias will be of equal size, but in the opposite direction, in February.
China's Statistics Bureau estimates that the upward bias to January's y-o-y industrial output growth was 12pp. We have examined the past four occasions
when China's lunar new year holidays fell in different months of successive years, and by averaging the January and February industrial output data we calculated the average bias to be 8pp.
Based on the aforementioned estimates of the bias, it becomes clear that
China's underlying industrial output growth actually weakened quite sharply to 8.9%-12.9% y-o-y in January from 14.4% in December. Weakening underlying industrial activity is consistent with most other data released so far for January. While China's export growth picked up to 42.2% y-o-y in January from 32.7% in December, import growth slowed to 24.0% from 24.6%. China's Statistics Bureau did not provide estimates of the upward bias to the trade data, but we estimate China's underlying growth rates of exports and imports in January at 32.2% and 9%, respectively. Hence, exports held up in January, but there was a marked weakening in imports . Also, between December and January there were slowdowns in M2 money supply growth (14.6% to 14.1%) and bank lending growth (14.5% to 14.2%). Last year, China's booming economy did not "land" at all, with GDP growth of 9.5%.
However, the January data available so far, adjusted for the "lunar new
year effect", suggest the economy may be starting to slow. Of course, one month of data does not make a trend. But an economic slowdown would be consistent with the government's tighter policies, including the first interest rate hike in nine years. Moreover, with producer price inflation (7.1%) outstripping consumer price inflation (2.4%), the profit margins of producers are being squeezed, and their inventories have also risen sharply.
Given that exports were robust in January, it seems that either weaker
domestic demand or an inventory drawdown caused the slowing in underlying industrial activity. And given that China's underlying imports weakened sharply in January, and that they tend to be capital intensive, our hunch is that the slowdown was concentrated in investment and possibly inventories. That would be good news. China's fixed-asset investment grew by 26% last year and, while slowing, it is still growing faster than GDP.
This means that China's already very high investment/GDP ratio, of almost
50%, is still rising. To sustain high growth rates, China needs consumption to grow by more, and investment by less. We are optimistic that this
rebalancing of GDP is happening, and we keenly await the retail sales and fixed-asset investment data for verification. End.