Industrial Growth Hits New High, Bolstered by Steel and Automotive Output

Data released by the National Bureau of Statistics (NBS) show that growth in industrial added value accelerated to 12.3% in year-on-year (y/y) terms in August from 10.8% y/y in July, marking a new record growth rate since October last year, when the Chinese economy was thrown into a tailspin by the global financial crisis. In cumulative terms, the Chinese industrial economy expanded 8.1% y/y during the first eight months of this year, an acceleration of 0.6 percentage point from growth in the first seven months and a deceleration of 7.6 percentage points from the corresponding period last year.

The heavy industrial sector was the main driver of growth, expanding 13.2% y/y in August (compared with 11.3% y/y in July), with sharp upswings in steel and automotive output. In August, output volume of crude steel soared 22% y/y, accelerating from a 12.6% y/y rise in July and representing the steepest y/y growth rate since November 2006. Automotive output, measured in units, also staged an extraordinary 90% y/y surge in August, compared with a 51.6% y/y rise in July. This automotive output growth was also the fastest ever since the series began in 1999.

Deflation Nears Turning Point

Both the consumer price index (CPI) and producer price index (PPI) reached turning points in August, as the decline in the CPI moderated to 1.2% y/y from a drop of 1.8% y/y in July and the decline in the PPI eased to 7.9% y/y from 8..22% y/y in July. This was the first time that the PPI decline narrowed since the index turned negative in December 2008, while the CPI decline was also the smallest since the index turned negative in February this year. In cumulative terms, the PPI dropped 6.4% y/y in the first eight months of the year and the CPI decreased 1.2% y/y. The significant easing of deflationary pressure is shown more clearly by the month-on-month (m/m) data for the CPI, which rose 0.5% m/m in August, lifted by a 1.3% m/m increase in food prices and marking the first m/m increase in the CPI since January. In the meantime, the PPI also edged up by 0.8% m/m, the fifth consecutive m/m rise.

Investment Growth Firms, Exports Still Act as Drag

Urban fixed-asset investment (FAI) in China rose 33.0% y/y in the first eight months of the year, roughly the same as in the first seven months and a 5.6-percentage-point acceleration from the corresponding period last year. Although government-backed stimulus investment remained the most important factor underpinning FAI growth, the revival of the domestic housing market also lent momentum. During the first eight months, real estate investment growth accelerated to 14.7% y/y, from 11.6% y/y in the first seven months, while investment in railways—the major thrust of the fiscal stimuli—expanded 103.5% y/y, slowing from the 126.9% y/y rise in the first seven months.

Retail sales, a close proxy of private consumer spending, continued to expand at a rather impressive pace, by 15.4% y/y in August, accelerating from a 15.2% y/y rise in July, bolstered by a 34.8% y/y increase in auto sales and a 10.9% y/y increase in home appliance sales. Growth of both automotive and home appliance sales continued to accelerate during the month, boosted by government subsidies for auto and appliance trade-ins. Nevertheless, the external sector remained the weakest link of the economy, as exports fell 23.4% y/y and imports contracted 17% y/y in August, according to data released today by the national customs authorities. The cumulative fall in exports during the first eight months of the year came in at 22.2% y/y, the steepest decline in the past decade.

Liquidity Still Ample

Data released by the People's Bank of China (PBoC) today indicate that M2, the broad money supply, soared 28.52% in y/y terms as of the end of August, returning to the level in June and nearly double the growth rate prior to the shift to a moderately easy monetary policy towards the end of last year. New renminbi (RMB) lending by domestic financial institutions came in at 410.4 billion yuan (US$60.4 billion) in August, which although smaller than the monthly average of 1.23 trillion yuan in the first half of the year beat expectations of an even lower lending growth rate following a sudden atrophying of bank lending to only 355.9 billion yuan in July. Total RMB lending during the first eight months hit 8.15 trillion yuan, 5.04 trillion yuan more than in the same period of last year. The sudden contraction of new bank lending over the past two months has come as the Chinese central bank starts considering "dynamically fine-tuning" monetary policy and after the banking regulator recently tightened capital requirement for commercial banks.

Outlook and Implications

The latest data show that the Chinese economy has continued to build on the momentum gathered in the second quarter, when a growth spurt was fuelled by a massive liquidity injection and a rapid expansion of capital spending. Most notable over the past two months since the release of the first-half GDP results is that momentum has started gathering in the real estate sector, with an upsurge in housing sales, as well as in the steel sector, which has seen record-high monthly output for two straight months. These sectors, combined with a strong auto sector and massive public spending, have laid the foundations for a rally in the Chinese economy, led by domestic demand.

Global Insight (Reino Unido)