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Chinese Stats Suggest that Activity Is Accelerating

After a very weak H1 2013, several data confirmed that Chinese activity is recovering and this trend could be sustained in the coming months thanks to a global recovery, an increase of government spending and an accommodative monetary policy.


1/ The price of basic materials shows that demand has become stronger since the end of June which suggests an improvement of industrial production:
- Imported Iron Ore Prices rose 14% since the end of June while Domestic steel prices increased by 9.5%.
- Copper prices is still up 3.2% on the same period.


Source: Bloomberg


2/ This move was confirmed this morning by the rebound of imports in July:
- Imports Y/Y: +10.9% v -0.1%e (-0.7% prior).
- Jul Iron Ore imports record 73.1M tons, +26.4% y/y, record high > June Iron Ore imports 62.3M tons, +6.8% y/y.
- Jul Copper, Product imports 410.7k tons v 380.0K tons m/m, +12% y/y > June Copper, Product imports 379.9k tons, +9.7% y/y.


3/ Exports also rose in July thanks to the recovery in EU and acceleration in US:
- Exports Y/Y: +5.1% v +0.5%e (-3.1% prior).
- Exports to US: 5.2% y/y in July > -5.4% y/y in June.
- Exports to EU: 2.8% y/y in July > -8.3% y/y in June.


4/ The main indicators (Baltic Dry Index, Global PMI) suggest that global growth is also accelerating:
- On a Y/Y basis (MM-20 days), Baltic Dry index turned positive in July and rose 18% yesterday.
- JPMorgan’s Global Manufacturing PMI edged up to 50.8 in July from 50.6 in June.


5/ Government spending will accelerate in H2. As an example, State-owned railway giant China Railway Corporation (CRC) has announced a plan to raise fixed-asset investment to 660 billion yuan (106.5 billion U.S. dollars) this year to boost railway development.


6/ Since the end of June, PBOC has adopted a more accommodative policy and could cut RRR in the coming months:
- Today: PBoC to issue CNY15B in 14-day reserve repos in today’s session; For the week, injecting CNY20B v CNY136B in prior week.
- On August 2: China PBoC Q2 Monetary Report: Reiterates to continue to implement monetary policy and fine-tune action when necessary via numerous tools (including RRR).


Chinese Credit Data Give Room for PBOC to be Proactive in Q3

Yesterday, PBOC released data which show a credit slowdown in June. Aggregate financing, the PBOC’s broadest measure of credit that includes bond sales, entrusted loans and bankers’ acceptance bills, was CNY1.04 trillion in June (the lowest figure since 14 months). That was down from CNY1.19 trillion in May and CNY1.78 trillion a year earlier.


The decline was matched by slower growth in money supply. M2 money supply rose 14% YoY (the slowest pace in six months) and was below forecasts of 15.2% YoY. Yet, it still exceeded the government’s 2013 target of 13%.


Even if Premier Li Keqiang has indicated he won’t boost credit to support the economy even as the pace of expansion slows, these figures give more room for PBOC to intervene in the money market and avoid another significant rise of short term interest rates.


As a reminder, short-term interest rates briefly shot as high as 30 per cent late last month after the central bank declined to add cash to an interbank market gripped by tight liquidity conditions, which were caused in part by a seasonal rise in demand for cash. At least five companies canceled or delayed scheduled bond sales of some CNY32.1 billion last month amid the cash squeeze.


Moreover, if PBOC manages to limit M2 growth in the coming months and push it below the threshold of 13% YoY, PBOC could adopt a more accommodative stance in a context where inflation remains contained (2.7% YoY in June against a target of 3.5% YoY).


As a consequence, at the end of Q3, coupled with more public investment (railways, public housing…) and a recovery of global demand (US, UK, Eurozone), Chinese growth could accelerate.

Chinese Trade Data Suggest Weak Outlook

China’s exports and imports unexpectedly declined in June, underscoring the severity of the slowdown in the world’s second-biggest economy.


The trade surplus was $27.1 billion for the month, compared with the median analyst estimate of $27.8 billion. Yet, overseas shipments fell 3.1 percent from a year earlier (first decline in 17 months), data from the General Administration of Customs showed in Beijing today, compared with the median estimate of a 3.7 percent gain in a Bloomberg News survey. Imports dropped 0.7 percent, while the median projection was for a 6 percent increase.


The weak trade data pose further downside risks to the June and Q2 growth numbers and help reinforce concern over risks in H2 if officials do not increase public spending:


More form Reuters:


China’s exports fell 3.1 percent in June from a year earlier, the first decline since January 2012, while imports dropped 0.7 percent, severely missing market expectations and reinforcing signs of a economic slowdown in the second quarter.
The downbeat trade data follow the government’s crackdown on the use of fake export shipment documents to close a loophole for short-term money inflows which had exaggerated China’s export performance.
China’s exports to the United States – the country’s biggest export market, fell 5.4 percent in June from a year earlier, while export to the European Unison dropped 8.3 percent, according to the customs.
“The surprisingly weak June exports show China’s economy is facing increasing downward pressure on lacklustre external demand,” said Li Huiyong, an economist at Shenyin & Wanguo Securities in Shanghai
“Exports are facing challenges in the second half of this year. The appreciation of U.S. dollar and the Chinese government’s recent crackdown on speculative trade activities also put pressure on exports.”
China had a trade surplus of $27.1 billion in June, the customs administration said in a news briefing, largely in line with $27.0 billion expected by economists.

Chinese Data Released on Sunday Showed Subdued Activity Across All Segments of Economy

Several data published on Sunday confirmed evidence that Chinese economy lost growth momentum in May. Domestic demand especially private and public investments failed to compensate the fall of exports  as factory output increased 9.2% YoY in May down from 9.3% in April and urban fixed assets investment reached 20.4% Ytd (8-month low).


More details from Business Insider:


“First, industrial production climbed 9.2% on the year, slightly below expectations for a 9.4% rise. Industrial production in May was led by heavy industries, with steel products up 11.3% year-over-year (YoY), up from 8.1% in April. Auto production slowed to 15.7%, from 18.3%, according to Bank of America’s Ting Lu.


Second, fixed asset investment (FAI) was up 19.9% on the year, and year-to-date FAI was up 20.4% on the slightly below expectations for a 20.5% gain. Remember FAI is a good gauge of a country’s investment activity. A breakdown of FAI activity showed that manufacturing FAI eased to 16.5%, from 17.9% because of “sluggish” external demand. Railway FAI slowed significantly to 24.2% YoY, from 62% in April. But year-to-date railway FAI was up 24.5%, compared with -41.6% last year for the same period. Planned investment, which is a leading indicator of FAI eased to 15.4%, from 17.9%. And finally, property FAI fell to 19.4%, from 23.2% the previous month.”


Finally, note that in a context where CPI and PPI also slowed in May to respectively 2.1% YoY (against 2.4% YoY in April) and -2.9% YoY (against -2.6% in April), PBOC could only choose to lower exchange rate (Yuan/USD at all time high) because money supply increased by 15.8% YoY in May (above the official target of 13%) and housing prices have rebounded sharply since last summer.