CDT Money: Trade Contraction Fuels Concerns

With China continuing to weigh a possible financial lifeline to Europe, the week’s economic news began with a warning from the IMF that prolonged trouble in the eurozone could halve China’s GDP growth in 2012. The new “downside” forecast released by the organization’s Beijing office on Monday cautioned that “financial volatility emanating from Europe” could pull down growth by as much as 4 percentage points from the current projection of 8.25 percent (which it also revised downward from 9 percent), but stopped short of predicting a “hard landing” due to China’s track record of fiscal discipline. From the IMF report:

The weak external outlook underscores the importance of accelerating the transformation of China’s economy to reduce its vulnerability to the vagaries of global demand. China has taken a number of encouraging steps, including appreciating the renminbi, making substantial investments in the social safety net, expanding pension and health care coverage, raising the minimum wage, and beginning to raise the cost of inputs to production (particularly energy). Greater efforts are now needed to raise household income and shift the growth structure from exports and investment toward consumption.

Other news throughout the week did little to stir optimism or counter the IMF’s downside view. Domestically, the Ministry of Commerce announced that sales during the Lunar New Year holiday – typically one of the busiest shopping seasons of the year – grew at the slowest pace since 2009. Even luxury brands, which have poured into China to meet booming demand, reported disappointing numbers and a tentative sentiment among browsing customers who just last year “were grabbing everything.” January auto sales hit the brakes as well, tumbling more than 25% year-on-year in the sector’s biggest drop since 2005.

Friday’s January trade figures only reinforced hints of sputtering domestic demand. Exports fell for the first time in 2 years, and imports plunged 15 percent from a year earlier  – All in all, China’s biggest trade decline since the 2008 global financial crisis. While crude oil imports hit the third-highest level on record and copper imports rose in January compared to a year earlier, commodity imports declined overall from December. And even with the holiday period factored in, The People’s Bank of China said Friday that new RMB loans totaled 738 billion yuan in January, less than 75% of the consensus estimate of around 1-trillion yuan. The trade data and lending shortfall led some to believe the government would soon loosen monetary policy, possibly through a cut in the reserve requirement ratio that many expected to happen last month. From Reuters:

Lunar New Year distortions will make policymakers wary of any hasty reaction. Most analysts expect them to assess January and February data combined before deciding whether the current policy of gentle easing should be intensified.

The week-long Lunar New Year holiday, which fell in January this year and in February last year, typically sees factories shut or run at half speed during the period.

But seasonal factors alone do not convince every economist that January is a one-off distortion, especially for trade.

“A fall of over 15 percent in January cannot be entirely explained by the Lunar calendar, and adds weight to the view that economic output is slower than headline indicators might suggest,” said Ren Xianfeng, an economist at IHS Global in Beijing.

One data point which could complicate the government’s easing plans, however, is inflation. China’s National Bureau of Statistics announced Thursday that January’s consumer price index rose 4.5% year-on-year, reversing a steady decline from last summer’s high of 6.5%, with food prices soaring 10.5%. If the CPI print contained any source of optimism, it was that nonfood inflation fell for a fifth consecutive month. Adding to the mixed message, this week’s wave of mostly negative news comes just a week after China’s manufacturing industry data surprised to the upside, signaling that domestic demand may help the economy withstand weakened exports after all. With PMI at its highest level since October, one government researcher told Xinhua News that “the country’s economic slowdown trend is stabilizing.”

Any attempt to dissect January and February economic data in China, and diagnose a hard or soft landing for the world’s second-biggest economy, may prove vexing. While the Chinese economy changes so rapidly that regularly charting its course is challenging enough, the lunar calendar magnifies such difficulties during the early months of every year. The Wall Street Journal dubbed the hazy picture the “Lunar New Year Effect.” “Our simple and humble suggestion is to wait for February data to come out and read two months’ data together,” one analyst told Reuters:

That’s what the Chinese government does. It lumps together the figures most influenced by factory closures, like industrial production and output data, into a combined January-February figure. The Lunar New Year never falls outside those months.

Other News:

[Editor’s Note: CDT Money is a once-a-week roundup of business and economic news from China. We’ll be giving an overview of business and economic trends from the world’s second-largest economy, as well as collecting the best news and analysis of the week from newspapers and the blogosphere.]

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