Pollution Made Priority, Despite Growth Slowdown
With the IMF’s inclusion of the RMB in its SDR basket, the People’s Bank of China on December 11th published an “RMB index,” against 13 major currencies. This indicates that the RMB exchange rate has officially shifted back to its formally announced regime of “managed floating with reference to a basket of currencies,” from its de facto US-dollar pegging. Although in the short run the yuan might still depreciate a bit, in the long run the more transparent basket-pegging system may increase stability expectations.
Fixed asset investment rose 10.2% y/y in real terms in November, and is expected to climb further, according to fast growing paid-in investment fund data. Industrial output rose 6.2% y/y in November, faster than in the previous two months. We expect the recovery to be sustainable, on the solid elements underlying the recovery, such as sound policies.
Retail sales of consumer goods in November rose 11.2% y/y in nominal terms. The economy is still in a deflation stage. CPI rose 1.5%, up 0.2 pps from October, still a very low level. The ex-factory price index of industrial products fell -5.9% y/y, and PPI fell -6.9% y/y.
Exports in dollar terms fell -6.8% y/y in November, almost flat on October, and imports fell -8.7% y/y, narrowing by 10.3 pps. The Fed’s interest rate increase -- for the first time in nine years -- will increase dollar appreciation pressure. If the dollar appreciates against the yuan, Chinese exports will recover faster. Meanwhile, foreign reserves have been falling, from their peak of close to $4 trillion in June 2014, to their current level of $3.438 trillion.
M1 growth was still increasing at the end of November, by 15.7% y/y, up 1.7 pps from October, and up 11.4 pps from the end of June. It’s now growing rapidly. Expansionary monetary policy will have positive effect on the economy.
Pollution in China has recently attracted much international attention. On December 19th, the notoriously polluted city of Beijing once again issued a level-four red alert, the most serious level in the four-tier warning system. The alert means schools have to close, and half the vehicles in the city are banned from use. China’s pollution is a consequence of its rapid industrialization. The “new normal” – a relatively slower growth rate for structural change -- is partly a response to the problem of heavy pollution. Pollution is also pushing structural change, as industry must upgrade with environment-friendly products, such as adopting the successful BYD electric cars.
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