Thursday, May 07, 2009

Deflation, Lending Slow-down in China, Now What?

Dear All, new post for RGE Monitor

Victor Shih | May 7, 2009

The recently published PBOC Monetary Policy Report is filled with optimism. Growth is strong; investment is on the rise; even export is looking better....etc. Then, I noticed something strange about the report. Throughout the original Chinese version of the report, CPI is referred to as "CPI," and the figure for 1Q wasn't so bad at -0.6%. However, the figure for PPI was only mentioned in Chinese "生产价格" and only in a brief discussion under a large green box on page 36. The PPI figures for 1Q was horrendous! The price of industrial goods fell by 3.3%, 4.5%, and 6% in January, February, and March respectively. So deflationary pressure is getting worse, not better. In terms of commodities and energy prices, the trend for January through March was -5.3%, -7.1%, and -8.9%, again showing a negative trend. To give the PBOC credit, someone actually put the PPI figures for a number of products on their English website: http://www.pbc.gov.cn/english/detail.asp?col=6400&id=1346

I strongly suggest readers take a close look at it. There is still some incomplete reporting though. For example, capital goods on the PBOC website shows a price increase of 0.1%, but the price of industrial goods decreased in March. What's the relationship between the two? Instead of getting industrial output figures, we find some data on individual categories of industrial outputs, like cars, buses, and TVs at the end of the table. We find that the MoM price of washing machines stayed the same while the price of TVs fell in March...etc. What about other industrial goods used by firms, like heavy machineries?? In a way, this is very disappointing. I think China has made great strides in statistical reporting, but when things get bad, they return back to their old game: obfuscation. Of course, all governments are tempted to do so when things get bad!

The other interesting figure that will creep up on us is April lending. The major state banks, which typically account for half of lending, already report that total new loans made in April was only 220 billion RMB, implying that total new lending was in the 400-500 billion RMB range. As a reminder to readers, March new lending was 1.89 trillion RMB, so we see a very drastic slow-down in April lending. Now we will really put to test the notion that the stimulus has generated sustainable growth. If May and June lending continues to be in the modest range (say below 500 billion RMB--already pretty high), we will see whether growth continues to be strong, investment continues apace, and whether housing and stock markets continue to rally. We'll see.

Quote: "The PPI figures for 1Q was horrendous!"

These are year-on-year figures, though. And the world-market prices of major commodities (crude oil, iron ore) are down sharply y-o-y, something that has nothing to do with China's domestic economy.

Presumably, those industrial goods that draw heavily on imported commodities (e.g. steel) also see a trend towards lower prices because input prices have plummeted.

(Not really disagreeing with you, just trying to put it into perspective.)
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