Chinese monetary and leading indicator data have firmed, suggesting that the economy will regain momentum later in 2012.
The first chart shows six-month growth in industrial output and real money / loans. The 2011-12 economic slowdown was foreshadowed by a fall in real money expansion starting in 2009 and extending to mid-2011 for the broader M2 aggregate and early 2012 for narrow money M1. Real M2 and loans, however, have been growing respectably since late 2011 while M1 has now picked up (although the July six-month change was inflated by an erratically-weak January base – a partial retracement is likely in August).
The monetary message is supported by a leading indicator derived from the OECD’s Chinese leading index, with the indicator firming gently since late 2011 – second chart. (The OECD index includes M2 as one of seven components – the others are production of motor vehicles, fertiliser, steel and buildings, a business survey measure of overseas orders and stock market turnover.)
The forecasting approach here emphasises real M1, which recovered later and has yet to post solid growth. This suggests that economic improvement will be delayed until late 2012 / early 2013 while GDP expansion will remain subdued by the standards of recent years.