At the close of domestic stock markets on Wednesday, investors could be forgiven for thinking it was 2008 all over again. Ahead of an expected economic update by the US Federal Reserve, the Shanghai Composite Index joined other Asian indexes in sharp drops, falling by 4.66%. It was an unusual sight for an exchange that had closed the previous day up more than 79% since the beginning of the year.
The Fed was not solely to blame. Market watchers saw the decline as a further indication of investor wariness about possible tightening measures by Beijing. Data showing bank lending had fallen to US$52 billion in July from more than US$219 billion in June seemed to confirm these fears.
However, Citigroup China Economist Ken Peng drew a very different conclusion. "[Bank lending] is in line with new lending levels that are consistent with 9% real growth, which we estimate to be RMB300-450 billion (US$43-65 billion) monthly," Peng wrote in a August 11 report. "If sustained, this would still be able to support recovery, while avoiding a sharp turn in policy."
In explaining its desire to maintain a relatively loose monetary policy, Beijing has said the economic recovery remains on shaky ground. More justification for this position came with the release of industrial output data, which showed value-added industrial production rose 10.8% in July, below market expectations. Most growth had come from heavy industries, which have been the focus of much government investment.
Smaller manufacturers fared less well as exports continue to fall: Weak global demand was behind a 23% year-on-year drop in exports in July. It was the ninth consecutive month of declines, and a sharper fall than the 21.4% drop recorded in June. Urban fixed-asset investment growth also fell to 32.9% in the January-July period, from 33.6% in the first six months.
Retail sales were more promising, indicating the continued economic health of domestic consumers amid a global downturn. Strong domestic consumption and a low base in the same period last year drove retail sales up 15.2% in July, and economists expect this growth to continue. However, a Ministry of Commerce statement warned that robust domestic demand would be unable to compensate for lower export volumes in the short term.
Taken together, the data would appear to indicate that Beijing is maintaining the correct approach in continuing to support an economic recovery.
"[The] recovery is well on track… But the lower-than-expected IP growth will likely convince policymakers to stick to the current accommodative policy stance," wrote Merrill Lynch economists Ting Lu, TJ Bond and Zhi Xiaojia.
Pick of the pundits
From "Strong July Imports of Industrial Commodities" by Jing Ulrich, J.P. Morgan chairman of China Equities, August 12:
China’s crude oil imports jumped 42% y/y in July, up from 14% in June. The record 4.6 million barrels per day (19.6 metric tons) of crude imports comes with the recovery in manufacturing activity and demand for automobiles. Refinery throughput increased 8.3% y/y in July, to a record 7.8 million bpd (33.1 mt). Benefiting from rising end demand and liberalized pricing, China’s refiners have increased production for six consecutive months. Some oil imports may have been used to replenish inventories… China’s state and commercial crude oil stockpiles declined by 2.7% m/m in June to 275 million barrels… With crude prices on the rise in recent weeks, retail prices may be set for another upward adjustment.
From "China Property Market Gathers Momentum" by Sherman Chan, Moody’s Economy.com economist, August 10:
For the first seven months of 2009, [property] sales were up 60.4% y/y in value and 37.1% in area. The house price index for the 70 major cities was up 1% y/y in July, after posting the fifth monthly gain… Despite seemingly strong market sentiment, the stark contrast between price growth in equities and real estate suggests investors remain cautious. Liquidating stock holdings is much easier than converting property into cash. Investors have likely favoured the stock market because of the ease in realizing gains or exiting due to risk aversion… Until the government’s policy direction is perfectly clear, investors may maintain a cautious attitude toward property investment. The relatively modest rise in property prices thus far in the year suggests that a potential real estate bubble is not yet a pressing concern.