A post in June suggested that Chinese economic prospects were improving slightly, based on stable, respectable real money expansion and a recovery in the “official” manufacturing purchasing managers’ survey. The official PMI is judged here to be more informative than the Markit / HSBC version, which was – and remains – weak.

July figures confirm that activity has firmed modestly – six-month growth in industrial output* recovered to 4.3% (not annualised) from a recent low of 3.3% in April.

This “good” news, however, is tempered by disappointing July monetary data. The six-month rates of change of real (i.e. inflation-adjusted) M2, M1 and broad credit (i.e. “social financing”) all fell last month – see chart.

Real M1 is accorded greatest weight here; its six-month change turned negative in July. This partly reflects an unfavourable base effect but is nonetheless concerning, suggesting that the mid-year spike in money market interest rates has damaged confidence and spending prospects.

Money market rates have since normalised but remain significantly higher than during the first half.

Chinese activity may lift further near term as the global economy strengthens – see previous post. The danger is that the authorities use such a pick-up as an excuse to delay monetary easing, without which the economy will be vulnerable if the global cycle turns down in early 2014.

*Based on a seasonally-adjusted levels series estimated from official data.