• Chinese data released yesterday and today suggest that growth is again accelerating slightly in early 2010. The export recovery continues unabated and domestic demand still looks solid with investment demand holding up surprisingly well despite the government’s recent moves to curb credit growth. On the other hand, inflationary pressure is increasing – albeit not alarmingly so.
  • Today’s data supports the view that China will soon start to raise interest rates and probably resume appreciation of CNY. Although today’s data was strong, we do not believe it will push forward monetary tightening. We still expect China to hike its leading interest rates in late April/May and resume appreciation of CNY in May.

Details

The data released in China yesterday and today was overall stronger than expected. However, before jumping to conclusions, it should be noted that economic data at the start of the year is always distorted by changes in the seasonal impact from the Chinese New Year holiday. This year, it fell in February compared with January last year. Because of the seasonal distortions, one typically gets a better picture of the economy by looking at January and February together.

Industrial production (our best indicator for GDP growth) was stronger than expected at 20.7% ytd y/y (consensus 19.5% ytd y/y). It appears that growth in industrial production is accelerating slightly in early 2010. According to our calculations, the average monthon- month increase in industrial production was 1.3% in January and February compared with 0.9% on average for Q4 09. This should be consistent with GDP growth accelerating to close to 11% q/q AR from around 9.5% in Q4 09.

In addition, demand continues to look solid. Exports continue to gain momentum consistent with strong export orders in manufacturing PMIs, and China’s exports have already recovered the loss since mid-2008. The fixed asset investment (FAI) data released today paints a better-than-expected picture for investment demand. As seen in the charts on the next page, FAI has recovered slightly in recent months and the overall picture appears to be that investment has broadly maintained its high level since Q2 09. At least there is little evidence of a sharp slowdown in investment demand.

Consumer price inflation as expected accelerated sharply in February to 2.7% y/y (consensus 2.5% y/y) from 1.5% in January, but a large part of the acceleration is due to seasonal distortions from the Chinese New Year (food prices usually increase in connection with the new year holiday). Hence we expect the year-on-year inflation rate to decline slightly in March. Nonetheless, inflationary pressure is increasing – albeit the level is not yet alarming and we still expect CPI inflation to exceed the government’s 3% target during Q2 10. However, it is not all bad news on inflation. Producer prices and the finished good price component from manufacturing PMI suggests inflationary pressure will soon peak, partly because commodity prices have stabilised (see chart on next page).

The development in house prices in China is a concern. Data released yesterday showed that house prices are now increasing close to 20% 3m AR (see chart on next page).