Monetary trends and leading indicators suggest that Chinese economic growth will exceed consensus expectations in the first half of 2017, supporting the view here that monetary policy will tighten, relieving downward pressure on the renminbi.
The OECD yesterday released November data on its country leading indicators. Six-month growth of the Chinese indicator* rose further and has now diverged significantly from industrial output momentum, signalling a likely catch-up of the latter – see first chart.
December monetary numbers released today, meanwhile, were solid. The additional detail is not yet available to calculate the preferred narrow and broad aggregates here – M1 plus household demand deposits (“true M1”) and M2 excluding financial sector deposits (the latter being volatile and largely unrelated to near-term spending decisions). Six-month growth rates of the headline M1 and M2 measures, adjusted for consumer price inflation, fell slightly from November – second chart. Real narrow money growth may have peaked in August 2016, suggesting a top in six-month industrial output expansion around May, allowing for an average nine-month lead. The lead time at the prior trough, however, was longer than nine months, hinting at a later peak in economic momentum**. The levels of real money growth, meanwhile, remain solid – there is no signal of a significant slowdown later in 2017.
In contrast to monetary trends, six-month growth rates of real bank loans and total social financing rose in December, the latter to its fastest since January 2016 – a further reason, along with strengthening economic news and rising inflationary pressures, for expecting monetary policy to tighten.
*The indicator has six components: production of steel, motor vehicles, fertilisers and buildings; the overseas orders index of the PBoC 5000 enterprise quarterly survey; and stock exchange turnover.
**The six-month change in real narrow money bottomed at end-2014, more than a year ahead of pick-ups in leading indicator and industrial output growth.