Outlook
Tim Flanagan
What impact will US trade protectionism have on ...
Tim Flanagan
Weak imports point to more evidence of weak ...
Data
Tim Flanagan
Five important things to note about China’s ...
Data
Tim Flanagan
China's Renewed Housing Boom to Support ...
Data
Tim Flanagan
China April PMI Numbers Modestly Lower, but ...

Data

Quick Data Update: Inflation remains low in May

China's CPI rose 1.2% in May, modestly lower than the 1.5% rise in April.  The core CPI number of 1.6% YoY is running a bit higher than the headline number, primarily on the fall in oil prices.  May's other economic data has so far shown that growth is still very weak, and a bottom has potentially not been reached. The CPI data adds to the worry that economic activity remains subdued.  

But, as I have mentioned before, PBOC easing measures will probably not translate into a growth rebound until sometime in the Summer.  If we don't see any change in activity in the next few months, then we should start to worry.  But for now, it will take time before easing leads to activity.

China's target inflation is around 3% for 2015.  With nearly half of the year over with, this target is either totally unrealistic or Beijing is confident that its stimulus measures will be successful in increasing activity in the real economy.

I don't think that we should view the low inflation numbers as a sign that more PBOC stimulus is imminent. Easing measures this year have already potentially unleashed trillions of RMB into the system and brought down interest rates considerably.  So, the PBOC may wait until measures already introduced have time to spread to the real economy before easing any further.  Or, the PBOC may resort to newer tools for stimulating growth without stoking excesses (like we have potentially seen in the stock market rally), like the PSL (see my PBOC infographic for details).

China's May trade numbers: Modest improvement in exports, but most signs still point to very weak growth.

China's trade data shows that the economy is still very weak. Exports declined 2.5% from last year, better than the decline of 6% in April, but still solidly below trend.  Imports declined 17.6% from last year as industry and construction continue to slow.  All-in-all, pretty bad numbers.

If you are waiting for a sign that growth is rebounding as a result of Beijing's stimulus measures, this data was not that sign.  In fact, declining import demand shows that overall growth is still very weak.

If you are waiting for some data to hint at an improved global growth picture, China's May export data was also not a good sign.

Key points in China's trade numbers:

  • The export decline was partly a result of weaker global demand and mostly a result of a much stronger CNY vs. nearly all of China's trading partner currencies over the last year.  
  • Export weakness will continue for some time for the same two reasons above. Beijing is unlikely to significantly depreciate the CNY to improve trade competitiveness.  China's leaders want to boost the CNY's standing as a reserve currency, including lobbying the IMF to include it in the SDRs in November.  That will require a stable, fairly valued currency, among other considerations.
  • The import drop was partly a result of declining prices of commodities and mostly a result of declining demand.  The sheer volume of shipments to China declined sharply.  I estimate an 11% drop in import volume after adjusting for the double digit commodity price declines over the last year.  The drop is a sign that industry and construction are still very weak. 
  • Imports will continue to remain weak until PBOC measures finally kick in (probably in the summer) and construction picks-up (probably in the fall).  See my blog post "Things will get worse before they get better." for my view on when Beijing's stimulus will kick in.
  • My view is that the PBOC is going to cut reserves again around October.  I am not sure if these numbers point to more easing before the Fall.  The PBOC may be inclined to wait and see if its measures taken in the spring will start to have some effect on economic activity in H2 before adding more easing measures.

Some details:

  • Commodity exporters continue to feel the brunt of China's slowing growth.
  • Asian manufacturers are still seeing weak demand as well, in a sign that the manufacturing supply chain is still pretty negative.
  • Iron ore imports by volume declined 8%, copper (excluding ore) declined 6%, and crude oil shipments by volume fell 11%.
  • Manufacturing imports also saw a significant decline from last year.

 

 

 

 

Quick Data Update: May PMI, Modest Improvement, but Still Weak.

The official manufacturing PMI came in at 50.2 for May, up very modestly from April's number of 50.1.  Although a slight improvement on the month, as seen on the chart below it is not clear that we are seeing a significant pickup in activity.  New orders PMI (50.6) does not show a clear pickup in activity either, although it has modestly improved as well.  The numbers are a bit better than last month, but the dial has barely moved.  It will still be a couple of months until the PBOC stimulus drives activity meaningfully higher. See my post "Things will get worse before they get better." for details.  Employment PMI came in at 48 - below 50 - and probably no comfort to Beijing policymakers who ultimately want to keep employment stable.

The worrying number is the non-manufactuing PMI.  At 53.2, non-many PMI is still above 50 and showing expansion.  But, the direction and the speed of the slowing number needs monitoring.  The service sector has been keeping GDP on target as the industrial sector slows below 7%.  If non-manu PMI goes below 50, then GDP growth will have a hard time staying above 7% this year.

Here are all PMI component charts:

http://laohueconomics.com/charts/#/urban-avenue/

Quick Data Update: Iron Ore Inventories

Iron ore inventories have fallen dramatically this year, in tandem with weak imports.  Iron ore prices are up 22% from the low point in early April this year.  This is promising data for the growth outlook, as well as the outlook for import demand in H2 2015.  We expect construction to pick up in late Q3, which will add to the inventory drawdowns and import demand.