Chinese economic and monetary data for October support the view that a growth revival is under way and will gather strength into the first half of 2016.
Annual industrial output growth fell back to 5.6% last month, equalling a low in March. Measured over six months, however, output momentum has recovered significantly since then – see first chart.
Annual growth of nominal retail sales rose to 11.0% in October, the highest since December and equivalent to 9.9% in real terms. Private investment weakness, meanwhile, may be abating: annual growth in nominal investment recovered from 6.7% in September to 8.5% last month.
These better signs are consistent with an earlier firming of monetary trends. The six-month rate of change of real true M1* bottomed at end-2014, recovering modestly during the first half of 2015 before surging in the third quarter – first chart. Allowing for a typical nine-month lead, this suggests a further revival in economic momentum in the fourth quarter and significantly stronger growth in the first half of 2016.
An October reading for true M1 is not yet available but six-month growth of real official M1 rose further last month – first chart. Real M2 expansion also strengthened. M2 was boosted by the earlier official operation to support the stock market, with share purchases reflected in a sharp rise in financial deposits. Growth, however, has rebounded even excluding such deposits.
Credit trends have also firmed. Monthly numbers for total social financing and bank loan creation were below market expectations in October but the six-month increases in the respective real stock measures have risen since August – second chart. Bank lending, like M2, was boosted by the stock market price-keeping operation but growth has recovered even excluding loans to financial institutions. Note that recent heavy bond issuance by local governments is not included in the credit aggregates.
Many economists use the rate of change of credit growth – the “credit impulse” – as a leading indicator of the economy. The impulse appears to be turning positive, undermining a key strand of the pessimistic case. (An analysis of G7 data since the 1960s showed that real narrow money provided more reliable signals of future cycle turning points than the credit impulse, with a longer average lead time.)
October government budget figures, meanwhile, confirm a substantial loosening of fiscal policy, with spending up by 36% from a year earlier – third chart.
*True M1 = official M1 plus household demand deposits. Official M1 = currency in circulation plus corporate demand deposits. Real = deflated by consumer prices.
