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13/12/2009 | China's Growth Gathers Force in November with Big Upswing in Exports and Prices

Global Insight Staff

The Chinese economy staged another major upturn in November, as industrial output growth accelerated to a record high in more than two years, with a sharp upswing in exports and prices.

 

IHS Global Insight Perspective

 

Significance: November saw the biggest upturn in China's growth since last year, after the industrial output growth rate more than doubled in March with the start of the Chinese economic recovery.

Implications: Much of the upswing in output and exports has been due to a strong base effect, with the big upturn being a mirror image of the severe downturn in the same month of last year.

Outlook: With the strong performance in both October and November, China will have quite a strong final quarter, which will help push the country's growth well above the government's targeted growth of 8%.

Another Big Upturn in Output

November saw another huge upturn in industrial output, with growth of industrial added value accelerating to 19.2% year-on-year (y/y) in November, from 16.1% y/y in October, helped by continued strong rebound of the heavy industry and a big base effect. This marked the biggest upturn of this year since industrial output growth more than doubled in March. Cumulative industrial output growth in the first 11 months came in at 10.3% y/y, back to the double-digit territory for the first time since the downturn struck last year. Much of the momentum still came from the heavy industrial sector, which recorded growth at 22.2% y/y in November, a marked ascent from the 18.1% y/y increase in October. The light industrial sector lags behind, with 12.6% y/y growth—a marginal acceleration from the 11.3% y/y rise in October. Within the heavy industrial sector, there was a shift in growth dynamics among main sectors such as steel, cement, chemicals and automotive, reflecting both different extents of base effects and recent curbs on steel, cement and other industries with overcapacity problems. Steel and cement output growth slowed to 37.4% y/y and 18% y/y respectively, from a growth of 42.4% y/y and 23.9% y/y in October respectively, ending their steep climb since the second quarter. The automotive sector remained quite strong, with output soaring 100.8% y/y in November, a record high, mainly attributable to a big base effect—auto output plunged 15.9% y/y in November last year after a marginal fall of 0.7% y/y in October.

Sharp Rebound in Foreign Trade, Slower FAI and Consumption Growth

The exports sector staged the strongest upturn since the start of the exports downturn last year, as the pace of exports decline narrowed sharply to 1.2% y/y in November from a double-digit fall of 13.8% y/y in October—a mirror image of just as sharp a descent last year from a 19% y/y rise in October last year to a fall of 2.2% y/y in November. Imports turned around even more drastically, registering 26.7% y/y growth, ending 12 straight months of decline and reflecting a much bigger plunge in imports last year—imports plummeted 18.1% y/y in November last year. Due to much faster recovery of imports relative to exports, the country's trade surplus narrowed to US$19.1 billion in November, from US$23.99 billion in October.

Fixed-asset investment (FAI) still led the recovery, registering 32.1% y/y increase in the first 11 months, although this marked a slight deceleration from a 33.1% y/y growth in the first ten months, mainly reflecting seasonal slowdown across the board as well as capacity investment curbs on industries with serious overcapacity. Retail sales growth also slowed marginally in November to 15.8% y/y from 16.2% y/y in October, with weaker growth in spending on such items as food, home appliances and furniture. Nevertheless, auto sales remained strong, accelerating to a growth of 61.5% y/y in November from 43.6% y/y in October.

End of Disinflation

The consumer price index (CPI) finally climbed out of deflationary territory and registered 0.6% y/y increase, ending nine months of straight decline. Much of the pressure on consumer prices comes from food, which registered 3.2% y/y increase in November—the fourth straight month of rise and doubling growth in October. CPI of non-food products still dropped 0.7% y/y, reflecting persistent deflationary pressure coming from overcapacity. For producers, the producer price index (PPI) decline narrowed sharply to 2.1% y/y, the smallest drop of this year.

Growth of M2, the broad money supply, rose 29.74% y/y as of the end of November, a new record high that doubled money supply increase in the same period of last year. Yuan lending added another 294.8 billion yuan in November, a slight increase from the 253 billion yuan lending recorded in October, although much lower than the 1.2 billion yuan monthly average in the first half. Total lending in the 11 months through November came in at a staggering amount of 1.26 trillion yuan, exceeding the combined total for the previous three years.

Outlook and Implications

The strong results of November are well expected, due to the existence of a big base effect with the drastic slump of output in the final quarter of last year. Indeed, both output growth and exports growth in the entire fourth quarter this year and the first two quarters of next year will be quite strong, mainly a result of such base effect. For the external sector, import growth will still outpace exports growth, due to the faster recovery of the Chinese economy relative to global demand, which may limit the exports sector's net contribution to overall GDP growth. With strong FAI growth, stable consumer demand and the turnaround of the exports sector, IHS Global Insight expects the Chinese real GDP growth to come in at 8.5% this year.

November is also a watershed for disinflation and inflation for China, as CPI inflation advanced into the positive territory after months of deflationary slide. This stokes fears about the advent of another vicious inflationary cycle in China, fuelled by stunning money supply growth. While real goods market inflationary pressure is likely to remain quite mild due to oversupply and relatively weak demand, the recent acceleration in food price increases needs to be watched as this component has traditionally been the main source of CPI inflation in China. Its impact on goods prices limited, the liquidity deluge unleashed by the ultra-easy monetary policy this year has already caused price inflation on the asset market, particularly the housing market. With relatively subdued goods market inflation and severe asset price inflation, the likelihood for interest rate hikes in China is low in the first half of next year, and the government will be more inclined to use such tools as window guidance, administrative curbs as well as taxation tools to contain lending growth and asset market bubbles.

Global Insight (Reino Unido)

 


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