150212 china year of the sheep

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Group Economics Emerging Markets

China Watch

Arjen van Dijkhuizen +31 20 628 8052

Weak start to the Year of the Sheep

12 February 2015 Just before the start of the Year of the Sheep, weak data confirm the ongoing slowdown of the Chinese economy, although special and seasonal factors in the run-up to the Chinese New Year play a role as well. We expect the slowdown to remain gradual in 2015-16, assuming the authorities to add further stimulus if needed to prevent a hard(er) landing. Moreover, the external environment is becoming more favourable (low oil prices, expected pick-up in advanced economies). Main risks continue to come from high overall debt levels, shadow banking and overcapacity issues, while fiscal pressures are rising. China remains resilient to a (faster-than-expected) Fed exit, but we expect the yuan to weaken versus the USD in 2015-16. Weak domestic demand confirmed by PMI data …,

volatile price components, core inflation dropped further to

The January PMI data did not bring a very bright picture of the

1.2% yoy, the lowest level since September 2010. Since end-

state of the Chinese economy. The official PMI for the

2013, core inflation has fallen by 0.8 %-point. Meanwhile,

manufacturing sector fell to 49.8 in January, the first reading

producer price inflation remained in negative territory for the

below the neutral 50 mark since September 2012. HSBC’s

35th consecutive month, dropping to -4.3% yoy in January.

manufacturing PMI edged up a little, reaching 49.7 (December:

Looking ahead, we still stick to our 2015 inflation forecast of

49.6). The service sectors, which had hold up pretty well in

2% yoy (after having lowered it in late 2014), assuming a

recent months, did less than expected. HSBC’s Services PMI

recovery of commodity prices and the effects of some currency

fell by 1.6 points to a six-month low of 51.8 in January. As a

depreciation. The economic slowdown and drop in inflation is

result, HSBC’s composite output index fell to 51.0, the lowest

also reflected in a slowdown in growth of minimum wages,

level since May 2014. Due to the Chinese New Year holiday

although in the current environment more wage restraint is

break (18-24 February), retail sales, industrial production and

desirable to preserve China’s external competitiveness.

fixed investment figures will not be published this month.

January trade data clearly disappoint Headline inflation drops below 1%

% yoy

60

% yoy

8

15

40 10

6

5

20

4 0 2

-5

0 -20 11

0

-10 11

12 CPI (lhs)

13 Core CPI (lhs)

14 PPI (rhs)

15 Food (rhs)

12 Export growth

13

14

15

Import growth

Source: Thomson Reuters Datastream

Source: Thomson Reuters Datastream

… and by surprisingly weak trade data … by a sharp decline in headline inflation …

Weak domestic demand also contributed to January’s poor

Next to the sharp drop in food and other commodity prices,

trade data. Import growth was negative for the third month in a

weak domestic demand and overcapacity issues – particularly

row, recording the sharpest contraction (-19.9% yoy) since the

in the manufacturing and property sectors – also contributed

global financial crisis. Still, import data often show sharp dips

to the further decline in inflation. After stabilising at around

at the start of the year, because year-to-year differences in the

1.5% yoy in late 2014, headline inflation fell to 0.8% yoy in

timing of the Chinese New Year lead to statistical distortions.

January, the lowest level since November 2009 and far below

The curtailment of overinvoicing also caused some distortion.

the PBoC’s target of 3.5%. Besides the sharp drop in energy

Finally, the sharp fall in import (particularly commodity) prices

prices, food price inflation fell to 1.1% yoy in January, the

also played a role. Meanwhile, after showing solid growth in

lowest pace since August 2009. Correcting for the most

the second half of last year, exports also disappointed last


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