China: Modest recovery underway

The latest data releases support the view that activity in the Chinese economy is accelerating again. GDP growth bottomed out in Q3 and is estimated to have accelerated to around 7.7% in Q4 (to be released January 18), resulting in growth of 7.7% for 2012. In 2013, GDP will increase by 8.1% and in 2014 by 7.7%. The Peoples Bank of China (PBoC) has held its key interest rate at 6.0% since the cut in July. (Chart 1) A rate hike is expected during the fourth quarter of 2013. Purchasing managers indices (PMIs) have improved lately and are above the 50 level. The official PMI held steady at 50.6 in December while the arguably more reliable Markit/HSBC PMI printed at 51.5 in December. (Chart 2) Price pressures are weak although headline inflation accelerated to 2.5% in December. The increase was mainly driven by a surge in vegetable prices; food inflation was 4.2%. Core inflation printed at 1.7%. (Chart 3) Inflation is expected to spike temporarily in February as a result of the timing of the Chinese New Year. However, inflation should not be a concern for policymakers during 2013. After weak figures in November, both exports and imports beat expectations in December, printing at 14.1% and 6.0% respectively in year-on-year terms. (Chart 4) The trade balance surplus surged above USD 31bn and exports to the euro zone reversed the previous trend and edged up 1.9% in year-on-year terms. Industrial production and retail sales showed healthy growth rates in November. Growth close to 10% and 15%, respectively, in year-on-year terms is expected for the December figures. (Chart 5) Electricity output is accelerating, supporting the view of recovery. (Chart 6) Housing prices, measured in 70 large cities, continue to rise slowly in month-onmonth terms. In November, prices were close to the level a year ago. (Chart 7) Property sales have continued to accelerate. New bank lending was CNY 454bn in December, way below expectations. However, bank lending matters less than in the past and total social financing showed a net increase of RMB 1.6trn in December. (Chart 8) However, in year-on-year terms, credit growth is leveling off. The yuan (CNY) has begun to appreciate against the USD again. (Chart 9)
Key data Percentage change

MONDAY 14 JANUARY 2013 Andreas Johnson SEB Economic Research +46 8 763 80 32 andreas.johnson@seb.se

2011 2012 2013 2014 GDP* Inflation* USD/CNY** 9.3 5.4 6.30 7.7 2.7 6.23 8.1 3.5 6.10 7.7 3.8 6.00

* Percentage change. ** End of period exchange rate. Source: MacroBond, National Bureau of Statistics of China, SEB.

Economic Insights

CHARTS ON THE CHINESE ECONOMY