Heat Wave Warms the Economy

CHINA - Report 26 Aug 2013 by FAN Gang and HE Liping

Executive Summary

The vast lands of central and southern China have been hit by heat waves this summer, with recorded temperatures at their highest since 1951. As an unexpected consequence, the economy warmed up, too.

Trade rallied significantly. Commodity exports rose 5.1% y/y in July, after shrinking in June, largely thanks to renewed demand from the United States and Europe. Imports also jumped 10.9% in July, ending the downturns of the previous two months. Imports of energy and raw materials are believed to be growing fast, reflecting faster domestic growth.

Electricity consumption rose 5.2% in the year to July, the first large increase in the year. This is obviously partially driven by the extremely hot weather. Industrial output managed to grow faster than in previous months: 9.4% in the year to July, from 8.7% in June.

Fixed asset investment was flat, rising 20.1% in the year to July, just as in June. FAI in high-speed railway construction has increased enormously over the past month, and July saw a further large rise. And FAI in property development accelerated outright, while both sales and prices of houses are rising.

After June’s liquidity crunch, the Central Bank seems to have scaled back its communications with the public. It may have effectively been easing its monetary policy stance ever since. The broad money supply rose 14.5% y/y in July, up 0.5 pps from June. Bank credit also accelerated over the month.
Chinese shadow banking – unconventional loans used extensively by regional and local governments, and property developers – is growing steadily. Tighter regulations put in place in March have slowed the business a bit, but it continues to expand. Not even June’s liquidity crunch has slowed its rise.

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