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China data to underline rebound but holidays distort

China's economic rebound should show signs of strengthening on Friday when the first hard economic data of the year are released, although distortions caused by the Lunar New Year holiday will make it difficult to gauge momentum

February 08, 2013 / 09:22 AM IST

China's economic rebound should show signs of strengthening on Friday when the first hard economic data of the year are released, although distortions caused by the Lunar New Year holiday will make it difficult to gauge momentum.

Global markets have been buoyed in part by expectations of a surge in China's export growth - forecast at an 11-month high of 17 percent in a Reuters poll - and an easing of inflation to 2.0 percent from December's seven-month high of 2.5 percent when January data is published.

That combination in a trade-oriented, inflation-prone economy is made all the more salivating by the prospect of a surge in bank lending to 1 trillion yuan that could signal robust credit supply and demand.

But analysts are wary of reading too much into data coming just one month after the world's second-biggest economy posted its slowest full-year expansion since 1999 at 7.8 percent.

"The one thing you can say for sure about the data is that base effects will dominate," Zhang Zhiwei, chief China economist at Nomura in Hong Kong, told Reuters.

"I think the overall trend of the recovery is intact," Zhang added, "but I guess it will be early March before we get a clear idea about the strength of the recovery path."

March is when China publishes the bulk of its economic data for January and February combined in a bid to smooth out the effects of the annual shift in the Lunar New Year holidays, when many factories shut for at least a week and often longer. The holiday fell in January in 2012 and will be in February 2013.

Trade is a case in point.

The median forecast of 16 economists polled by Reuters puts export growth at its highest since February last year and in sharp contrast to January 2012's 0.5 percent annual fall in shipments that signalled the start of China's most volatile year for trade since the global financial crisis.

A similar effect is anticipated in import data where a 23.3-percent median forecast for the year-on-year pick-up in goods ordered by China, while way above December's 6.0 percent, is not necessarily indicative of a sustainable jump in domestic demand.


Chinese stock prices have soared as recovery trades have proliferated. The CSI300 index of top Shanghai and Shenzhen domestic shares has rallied around 30 percent from its December low and hit a 17-month closing high this week.

Analysts at Citi reckon there's another 15-20 percent more to come during the first half of 2013.

January surveys of purchasing managers in both the services and manufacturing sectors clearly indicate that the economic recovery is real, although the pace is uncertain.

Meanwhile, the easing of inflation forecast for January is not expected to persist. A rebound is seen building alongside a broader economic bounce - albeit not one that is likely to be strong enough to breach 3.5 percent, a level that economists think the government will soon announce as its 2013 target.

"A rebound in inflation is pretty certain after March. The question is how strong that rebound will be," said Sun Junwei, Beijing-based China economist at HSBC.

The central bank is plainly already thinking about inflation risks, according to the fourth-quarter monetary policy report published on Wednesday by the People's Bank of China (PBOC).

"As the economy transits into another stage of growth, economic controls need to always emphasise containing inflation risks," the central bank said, seeming to shift its policy bias back towards inflation from growth.

"We should pay special attention to the effects of changing expectations on future prices," it added.

A near two-year economic cooldown in China and a determined battle with prices by the PBOC has brought inflation down from summer 2011's three-year high of 6.5 percent, but with growth rebounding on higher state investment and resilient consumer spending, price pressures are expected to intensify.

A buoyant housing market, where prices are again setting or climbing towards record highs, is also fanning inflation.

Rising wages in the services sector and for some labour-intensive farm industries, and super-loose monetary policies abroad are also fuelling inflation.

Sun says inflationary risks are well-contained in an economy expanding below the 9-9.5 percent that HSBC reckons is China's annual potential growth rate.


A more important issue for investors instead might be the trajectory of money supply, details of which could be released alongside the trade and inflation data.

China's new yuan-loans may have totalled 1 trillion yuan in January, according to a Reuters poll - up sharply on December's 454.3 billion yuan and November's 522.9 billion yuan.

Bank-lending is a focal point for investors trying to assess the bias in China's monetary policy as loans are made at Beijing's behest in the state-directed financial system.

A surge in new loans could indicate a supportive policy stance - despite the PBOC's inflation alert - as well as strong credit demand in the real economy.

But it could just as easily show banks flush with state-directed fresh lending quotas and anxious to put them to work early.

"It makes sense to be cautious," said Ting Lu, chief China economist at Bank of America/Merrill Lynch in Hong Kong.

first published: Feb 8, 2013 03:52 am

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