China announced a number of key economic statistics yesterday and today. I asked IHS Global Insight’s China analyst, Alistair Thornton, for his take on some of the figures. In terms of the hard numbers, he pointed out that lending growth had come in stronger than expected in March, with banks issuing 679.4 billion yuan in new loans, up from the 536 billion yuan in February. China’s broad money supply (M2) meanwhile rose to 16.6 percent in March, up from 15.7 percent in February.
‘The first quarter was always going to be volatile, given the supposed end to full-year lending quotas and attempted implementation of the so-called dynamic differentiated reserve ratio requirements (2D3Rs),’ Thornton told me. ‘As it stands, banks have lent around 2.25 trillion yuan over the first quarter, about 100 billion more than what’s likely to be the envisaged quarterly total. Working from a usual quarterly breakdown ratio of 3:3:3:1 and a rough full-year target of 7 to 7.2 trillion yuan, Q1 lending should have come out at around 2.1 trillion yuan. That said, taking into account January’s larger-than-expected figure (an explosive 1.04 trillion yuan), it could be argued that at this pace, authorities will be able to smooth lending through the end of the year to make their target.’
‘Still, liquidity growth remains in fiery territory, particularly if rumoured statistical revisions have taken place that have softened M2 growth rates. Indeed, it’s thought that M2 growth rates have been understated by 1 to 2 percentage points. There’s a bit of a base effect at work behind the M2 pick-up. Regardless, this indicates an unanticipated loosening, all at a time when the tightening was actually starting to pinch. The six reserve ratio increases and four interest rate hikes since October, in combination with stricter policing of bank lending and an attempt to pull off-balance-sheet lending back on the books, had been starting to bite, as witnessed in the interbank market in late January and late February.’
And what about the GDP figures released today?
The Chinese economy isn’t slowing as planned, or desired,’ Thornton told me, noting GDP had expanded 9.7percent year-on-year in the first quarter, to 9.63 trillion yuan. ‘The strong economic performance through Q1, despite the myriad tightening measures put in place over the past six months, should give policymakers confidence to more aggressively attack inflation and its root causes. Indeed, with CPI jumping to a 32-month high, it’s not hard to argue for further tightening,’ he told me.
He continued: ‘Even with four interest rate hikes and six reserve ratio requirement increases since October, tightening remains hesitant, although not without impact. Banks have been complaining of the credit squeeze that spiked interbank rates in late January and late February, and this has been feeding through into the real economy. Real estate investment has slowed steadily since its peak in early 2010, as the three rounds of administrative tightening measures and credit restrictions begin to bite. Controls have caused transactions to slump and price gains have no doubt been dampened.
‘That said, there does seem to be some renewed vigour in economic activity. Industrial production is at a high not seen since May 2010, although there remains some confusion given the statistical tinkering that has occurred. Furthermore, industrial production is measured in nominal terms, so is influenced by price levels. Importantly, PMI was also up in March, reversing three months of pull-back, and fixed-asset investment is reaccelerating.
‘To top it off, inflation remains stubbornly high, at 5.4 percent year on year, although the month-on-month data is more benign. This pressure is hardly surprising given the bank lending activities that have occurred through the first quarter.
‘Despite the most aggressive period of tightening in years, the government doesn’t seem able to slow the economy down. Beijing has had to regularly revert to heavy-handed administrative measures, such as direct price controls in the food sector and limits on house purchases in the property market, in order to contain inflationary pressure. With inflation expectations still running high and prices at disconcerting levels, the government will need to press on with its tightening schedule. Expect to see more movement on reserve ratio requirements, probably one more interest rate hike, and a slightly faster renminbi appreciation.’