09 June 2009

Emerging Markets Macro Comment

Serdar Küçükakιn, Senior Economist

Recovery in Chinese growth is on track

• Coincident indicators somewhat mixed

• Leading indicators point to improvement

Although the April activity indicators are somewhat mixed, The pace of retail sales growth has remained virtually
they support our view of a continued recovery in the unchanged, with a figure of 14.8% yoy being recorded for April,
months ahead. Growth in fixed asset investments has compared to 14.7% yoy in March. Retail sales were particularly
continued to accelerate and consumption seems to have boosted by vehicle sales, which hit a record monthly high of
held up quite well. However industrial production 1.15 million units sold. So far, therefore, the retail sector seems
moderated on weak exports and continued inventory to be holding up quite well, but it should be noted that some of
reduction. this strength is attributable to public-sector measures such as
tax cuts and subsidies.
Coincident indicators somewhat mixed
Investments in fixed assets accelerated further in April. The Growth in industrial production slowed to 7.3% yoy in April
figure of 30.5% yoy (up from 28.6% in March) was from the strong 8.3% yoy recorded in March. In our view the
considerably higher than what the markets had been weaker-than-expected IP is partly attributable to continued
expecting. In our view, this acceleration clearly reflects the reductions in inventories, as well as to a further decline in
positive impact of the enormous fiscal stimulus packages exports. Industrial production should continue to be supported
announced last November. A commonly heard criticism of by strong growth in investments, although weak exports and
these packages has been that they are mainly targeting the inventory dynamics are likely to remain a drag in the months
eastern urban areas and that rural areas are not benefiting at ahead.
all. The lion’s share of the newly started projects has allegedly
been awarded in urban areas, with rural areas getting very little Product inventories (electronics & comm. equipment)
support from the government. This claim, however, is not % yoy
justified as investment growth in the primary industry has
always been very robust and actually jumped considerably in 35
30
response to the implementation of the fiscal stimulus
25
packages. 20
15
Investment 10
5
% yoy
0
100 120 -5
80 100 -10
60 80 00 01 02 03 04 05 06 07 08 09
40
60
20
40 Source: CEIC
0
-20 20
-40 0 The decline in exports on a yearly basis came in much worse
05 06 07 08 09 than expected, with Q1’s 20.1% yoy drop increasing to 22.6%
Newly started projects (lhs) yoy in April. Although the April data are undeniably bad, the
Invesmtent in primary industry (rhs) increasingly positive signals for the region as a whole –
including, for example, the latest PMI, which shows the
Source: CEIC Singaporean economy returning to growth in May and the
contraction of the region’s industrial economy becoming

SERDAR KÜÇÜKAKΙN +31 (0)20 629 5086 ECONOMICS DEPARTMENT

 09 June 2009

considerably less severe – should help to boost China’s export
performance in the months ahead. The fall in imports slowed in
April to 23.0% yoy, compared to 25.2% yoy in March. This
resulted in the trade surplus narrowing
USD13.4 billion in April, compared to USD18.6 billion in March.
Leading indicators point to improvement
There have been quite some discussions among economists in
recent weeks about China’s May PMI figures, which at the time
were shortly due for publication. China publishes two PMI
figures: a semi-official figure and a figurer that, as in the West,
is compiled by a private institution.
The story behind the discussions was a belief that the official
PMI could not really be trusted because it originated from a
semi-government body. Specific comments were made about
‘strange’ seasonal effects in the index. In the short, four-year
history of the index, the PMI has previously always recorded a
substantial fall from April to May. That could also happen this
year, some economists warned, and the index would then fall
below the critical barrier of 50. Interestingly, however, this did
not happen this year. Instead, the index fell only marginally
from 53.5 to 53.1, and the economy is clearly still continuing to
grow. A point of particular interest is the fact that the new
export orders component rose from 49.1 to 50.1, which means,
according to this index, that foreign demand for Chinese goods
started rising again in May.
billion, which is considerably lower than the record high of
CNY1.89 trillion recorded in March.
to about In our view, there are two possible reasons for the slowdown in
new lending. Firstly, the previously strong pace of credit
expansion was designed partly to provide matching funding for
government-funded projects. The second tranche of the
government’s funding of infrastructure projects was disbursed
in March this year, and this boosted that month’s credit growth.
Credit growth will undeniably get another boost when the next
tranche is made available. Secondly, the strong increase in
short-term loans and discounted bills was partly attributable to
banks boosting their loan books, while businesses used the
extra credit available to overcome their financing difficulties.
The significance of both factors has now decreased. Overall,
we expect credit and broad money to continue growing
robustly, albeit at a slower rate than in the first few months of
2009.
New loans
Billions of renminbi
2000
1500
1000

500
Various market participants were also firmly convinced that the
private PMI index would also drop below the critical barrier of 0
50 because, it was claimed, the government’s efforts were 04 05 06 07 08 09
proving far less successful than officially reported. We do not
share this criticism. Although we, too, have seen the delays in Source: Bloomberg
various public-sector projects, we realise that reality is always
somewhat more ‘challenging’ than the situation on the drawing
board. The bottom line is that the private PMI has continued to
strengthen, rising from 50.1 in April to 51.2 in May. In other
words, China has clearly managed to identify the way forward
for its economy, both according to the ‘official’ and the private
figures.

The yoy rate of growth in broad money and bank credit has
remained strong, with M2 growth rising to a record high of
26.0% in April compared to 25.5% in March. However the
growth in new lending dropped sharply in April to CNY 591.8

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SERDAR KUCUKAKIN +31 (0)20 629 5086 ECONOMICS DEPARTMENT