China still on moderate growth track, defying bears / bulls
Simon Ward
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The Chinese economy regained some momentum during the second half of 2014, but mixed leading indicator / monetary signals suggest that growth will remain moderate.
The six-month increase in industrial output peaked at 5.7% (not annualised) in December 2013, falling to a low of 3.0% in August 2014 before recovering to 4.4% in December*. Output rose by a strong 1.3% in December alone, partly reflecting catch-up after a below-par gain in November (when production was depressed by factory shutdowns to curb pollution in Beijing during an APEC meeting).
The economic slowdown and recovery were foreshadowed by falls followed by rises in real (i.e. inflation-adjusted) money supply M2 growth and a composite longer leading indicator – see first chart**. The leading indicator increased further in December but real money growth has fallen back since September. Monetary trends typically provide an earlier signal so this combination suggests that economic momentum will continue to strengthen in early 2015 before fading again towards mid-year.
Slightly better economic news reduces the urgency of further policy easing. Near term at least, the authorities may prefer targeted measures to cuts in reserve ratios or official interest rates, which would risk reigniting excessive stock market speculation. Record turnover in the Shanghai A share market in December was 2.4 times the previous monthly high in July 2009 – second chart.
*These figures are based on a seasonally-adjusted level series compiled by the World Bank.
**The components of the leading indicator are the NBS purchasing managers’ index, steel production, cargo handled at major seaports, the industrial sales / output ratio, residential floorspace sold and bank loans.
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