Weather and Economy Heat Up

CHINA - Report 24 Sep 2013 by FAN Gang and HE Liping

Executive Summary

China was hit by heat waves in July and August – with the weather in August even hotter, in many regions, than in July. Electricity generation rose 13.4% y/y over the month, its fastest climb in years.

The economy seems to be heating up too. Industrial output growth also rose 9.5% in the year to August. Investment is rising, too: fixed asset investment nationally rose 20.2% in the year to August, up moderately from June and July. FAI in railway construction rose 17.1% y/y, or 24.8% m/m. FAI in road and city subway system construction increased 23.8% y/y, or 19.7% m/m. FAI in real estate development slowed, but was compensated for by rises in other sectors.

Retail sales also picked up. House sales continue to grow rapidly, though at a slowing rate. Jumps in home sales have driven up sales of house-related goods.

Export growth is increasing, largely due to stronger buying in the United States, the EU and the ASEAN countries. Commodity exports rose 7.2% y/y in August, up 2.1 pps from July. But exports in processing trade grew slowly, suggesting a subdued long-term export growth outlook. Indeed, import growth has slowed from July, due mainly to the slowdown in processing trade. As such, China’s trade surplus rose to $28.5 billion in August, up dramatically from July’s $17.8 billion. Whether a good thing or not, this means China has no need to defend its currency right now. We remain cautious about the outlook of further growth in industrial output, however. Not only were there considerable temporal factors that pushed up industrial growth in July and August, but there are hardly clear signs of strong recovery in the demand for industrial products, at home or abroad. It’s unlikely that industrial growth will rise above 10% for the rest of 2013.

CPI rose 0.3% m/m, or 2.6% y/y, in August. PPI deflation has narrowed, as it began to rise in m/m terms (0.1%), though it is still negative in y/y terms (-1.6%). The basic stance of monetary policy remains neutral, and is expected to remain so for the near future.
Regional government debt has attracted widespread attention, with various estimates suggesting its ratio to GDP is 30%-50%. A major problem is that it is still growing. Many municipal and local governments are counting on rising land sales to finance their fiscal expansion and debt liabilities. Sooner or later, smaller cities in remote areas could turn into Chinese Detroits.

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