Economic recovery still on track

Qingkouhe Bridge in east Jiangsu province will soon be completed. China's August data release shows that the domestic economic recovery remains strong. Xinhua

China's August data release shows that the domestic economic recovery remains on track.

Continuation of the government's broad supportive policies is expected, while targeted adjustments might be used to control any overheating in certain sectors.

Overcapacity will help keep price inflation subdued, but measures to control it might dampen fixed asset investment (FAI) growth.

Recent liquidity concerns should prove unfounded with stimulus funding secure and the easing of loan growth in line with expectations.

As the initial stage of China's investment-driven economic recovery draws to a close, the government is expected to take concrete steps toward transitioning to a more domestic-oriented model of growth.

Industrial production

China's industrial production increased 12.3 percent year-on-year in August, up from 10.8 percent in July.

This constitutes the fourth consecutive monthly improvement and indicates a significant pick-up in the pace of expansion.

As indicated by the most recent Purchasing Managers' Index (PMI) data, industrial activity should continue to grow in the coming months, underpinned by resilient domestic demand and a rebound in exports.

Industrial production growth has been stronger in China's heavy industries that are benefiting from infrastructure construction. But the recovery in light export-oriented industries has been more tentative.

With programs to upgrade infrastructure under way across the country, there is good reason to believe that the momentum in downstream demand will continue into 2010 and beyond. This should be supported by an uptick in housing construction in the second half.

The robust pace of domestic investment and a gradual improvement in external demand suggest that industrial production growth should show further gains in coming months.

Consumer price index

China's consumer price index (CPI) declined by 1.2 percent year-on-year in August, from -1.8 percent in July. The producer price index (PPI) fell by 7.9 percent in August, from -8.2 percent in July.

Consumer price deflation has likely bottomed with food and fuel prices continuing to show strength.

While the CPI should begin to rise later in the year, inflation should be moderate, as producers and consumers alike continue to feel the effects of industrial overcapacity and unemployment.

The input price components of China's two manufacturing PMI series remain on the rise. The HSBC-PMI input price reading jumped to 66.9 in August from 59.1 in July, while the official NBS-PMI input price reading increased to 62.6 from 59.9.

Under the new refined products pricing mechanism from the National Development and Reform Commission (NDRC), retail prices for gasoline and diesel increased 4.6 percent and 5.2 percent, respectively, on Sept 2 - the fourth successive increase since March.

However, at the end of August, it was reported that fuel price adjustments would become less frequent.

Fixed asset investment

China's fixed asset investment (FAI) grew 33 percent year-on-year in the first eight months of 2009, compared to 32.9 percent growth from January through July.

FAI, fueled by the government's stimulus package, has become the most important contributor to China's GDP growth.

On a monthly basis, FAI growth has moderated slightly in the last two months, reflecting a slower pace of state investment - which was front-loaded earlier in the year. Nevertheless, the pace of investment remains robust by any reasonable measure. FAI in the real estate sector climbed by 24.6 percent year-on-year in July, up from 21.7 percent a month earlier, reflecting the rebound in housing sales in the first half.

People's Bank of China adviser Fan Gang recently told a CEO forum that China's property investment growth might rebound to about 30 percent next year.

We expect private sector investment, fueled by the recovery in housing construction, to become a more important driver of investment growth in the next several quarters.

China's economic stimulus has clearly been effective, but investment in some areas has driven up capacity to excessive levels.

The State Council and the Ministry of Industry and Information Technology have recently resolved to curb overcapacity and unnecessary expansion in several industries by restricting market entry and limiting approval of new projects for a period of three years.

While we expect funding for stimulus projects to remain adequate, concerns about overcapacity will bring stronger curbs to discourage irrational investment.

M2 money supply

Growth in China's broad M2 measure of money supply registered at 28.5 percent in August, compared to 28.4 percent year-on-year in July.

The People's Bank of China announced that new loans edged higher to 410.5 billion yuan in August, up from 355.9 billion yuan in July.

This brings aggregate new lending in 2009 to 8.13 trillion yuan, up 162.5 percent year-on-year from the first eight months of 2008. New loan creation is easing as the front-loading of new lending runs its course and banks become more mindful of credit risks.

Early in August, the People's Bank of China, NDRC and Ministry of Finance held a joint press conference reiterating the government's proactive fiscal policy and moderately loose monetary policy stance.

Slowing credit growth contributed to A-share market volatility throughout the month.

The China Banking Regulatory Commission (CBRC) recently stated that loan growth will be more stable in the second half of 2009.

Steps are being taken to ensure adherence to sound lending practices. Without mentioning specifics, the People's Bank of China will study the use of regulatory tools to adjust bank-lending activity.

The author is managing director and chairman of JP Morgan's China equities and commodities business. The views expressed here are her own.

(China Daily 09/21/2009 page2)