Monday, June 11, 2012


Thursday’s surprise interest rate cut by the PBOC prompted speculation that China’s monthly data for May would be especially weak when they were released this past weekend. Instead, they were mostly relatively strong:

(1) Trade. Exports in May rose 15.0% y/y to a record high, beating April's 4.9% gain. Similarly, May imports were up 12.7%, compared with April's 0.3%. Despite the recession in Europe, exports to the 27-nation European Union actually increased 6.0% in May, and 25.4% over the past three months almost back to last year's record high. Exports to the United States and to the "rest of the world" (excluding the US, EU, and Japan) jumped 10.9% and 10.6%, respectively, to new highs last month.

(2) Production. In May, China's industrial production rose 1.1% m/m and 9.7% y/y after a 9.3% rise in April. Electricity output rose only 3.2% last month, though it tends to be very volatile on a m/m basis. The three-month average increased 3.6% y/y, the weakest growth rate since July 2009.

(3) Retail sales. May’s passenger vehicle sales were up 22.6% y/y to 1.28 million vehicles. That beats April's 12.5% growth, which itself was an encouraging turnaround from a 1.3% decline from a year earlier. However, overall retail sales growth slowed a bit in May to 13.8% y/y from April's 14.1% pace.

(4) Fixed investment. Fixed asset investment climbed 20.1% in the January-May period from a year ago, just above forecasts for a 20% rise. Property development investment for the January-May period was up 18.5% y/y. The WSJ calculated that investment in May was up 18.2% from a year earlier versus a 9.2% rise in April. The official statistical bureau doesn't issue data for individual months.

(5) Money and Credit. Chinese banks made 793.2 billion yuan ($125 billion) worth of new loans in May. That’s up slightly from April’s 681.7 billion yuan lending pace. China's M2 rose 13.2% y/y in May. It has been hovering around 13% since the start of the year.

Given the strength of most these various indicators, why did the PBOC ease? The government is intent on boosting economic growth. China's central bank last week cut interest rates for the first time since the depths of 2008/09 global crisis while giving banks more freedom to set lending and deposit rates in a step along the path of liberalization. The central bank also reduced banks' reserve requirement ratio three times since last November to pump out additional funds that can be used to boost lending.

In recent weeks, the government provided incentives to purchase energy-efficient household appliances, targeted tax cuts, and accelerated approval for investment projects by companies and local governments. On Friday, officials called for additional spending on railway construction.

The PBOC has more room to ease since inflationary pressures are abating. China’s CPI came in at 3% y/y in May, down from 3.4% in April. China’s PPI fell 1.4% y/y in May, after a 0.7% y/y decline in April.

Today's Morning Briefing: Around the World. (1) Checking the “Checklist for Optimists.” (2) Chinese trade data are hot and spicy. (3) China’s electric power is low. (4) PBOC has room to ease as inflation subsides. (5) A world tour of austerity and insanity. (6) Greek strike could disrupt vote. (7) Spain gets a rescue package partially backed by Spain. (8) French socialists worrying about leftists. (9) A popular comedian-turned-politician in Italy. (10) Corruption is corroding India’s growth rate. (11) Californians on fast track to nowhere. (More for subscribers.)

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