Recent Chinese news has been downbeat, suggesting that the authorities need to accelerate policy easing to keep a “hard landing” at bay.
Chinese economic prospects seemed to improve in late 2011 as real money expansion revived in response to policy easing and a slowdown in inflation. January monetary numbers, however, were disappointing, with the six-month rise in real M2 falling back and real M1 showing a rare contraction – see first chart. The earlier-than-usual New Year holiday had a depressing effect but is unlikely to be the whole story, judging from a comparison with previous years when the timing was similar.
Downside risk is also suggested by a forecasting indicator derived from the OECD’s Chinese leading index – a composite of seven forward-looking economic and financial variables. The December reading of the indicator was the weakest since October 2008, signalling a further slowdown in industrial output in early 2012, a prospect that may be reflected in renewed weakness in business surveys – second and third charts.
Timely policy loosening in late 2011 warranted optimism that the authorities would successfully manage a necessary economic slowdown but their failure to deliver further stimulus so far in 2012 – probably reflecting brighter global news and lingering inflation concern – has been a mistake. The latest data, hopefully, will act as a wake-up call and catalyse another policy shift.