A batch of Chinese economic data due for release in the coming week will be closely scrutinized for clues as to whether the weakness seen in China’s twin manufacturing PMIs last month suggests that the economic rebound in the world’s second-largest economy is losing steam.
Both of China’s manufacturing PMIs were worse than expected in February. The HSBC/Markit index dropped from January’s 52.3 to 50.4 -- just a tad above the breakeven level of 50.
The official PMI, compiled for the statistics bureau by the China Federation of Logistics and Purchasing, fell from January’s 50.4 to 50.1. It fell by less, but its level is lower than the Markit PMI.
“The decline may reflect volatility around Chinese New Year, but, even allowing for such seasonal distortions, it still looks downbeat,” Qinwei Wang of Capital Economics said in a note to clients.
China’s economic growth eased to a 13-year low of 7.8 percent last year, from 9.3 percent in 2011 and 10.3 percent in 2010.
In his final “state of the union” speech on Tuesday, China’s outgoing premier issued an annual gross domestic product growth target of 7.5 percent for this year and a consumer price inflation target of 3.5 percent.
Past experience suggests that growth targets should be interpreted as the minimum level that the government aims to achieve, while inflation targets usually mark the trigger point for policy tightening.
“If this still applies, the lowering of the CPI target may indicate that the authorities aim to strike a better balance between growth and risk, with medium-term sustainability higher on the priority than short-term buoyancy,” Wei Yao, China economist with Societe Generale, said in a note.
Beijing also planned a fiscal deficit of 1.2 trillion ($191 billion) or 2 percent of projected GDP for this year. This compares to last year's budgeted and actual 1.5 percent of GDP.
This year will be special as the new leadership taking office from March will want to see China's growth recovery through to the end, rather than for it to dip back into another cycle of deceleration.
“Investment will likely be a major growth driver, supported by infrastructure investment and the ongoing stabilization of the property market,” HSBC economists Ma Xiaoping and Qu Hongbin, said in a report. They believe their bullish 8.6 percent annual GDP growth forecast is still below China's potential growth.
February Data Outlook
March 8 -- Trade: China’s export growth may have decelerated to 10.1 percent in February from a year earlier, slowing sharply from a rise of 25 percent in January. Meanwhile, imports likely fell 8.8 percent over the same period, following a 28.8 percent jump in January. The trade balance is forecast to show a deficit of $7.8 billion, according to economists polled by Reuters.
Port and factory closures around the Chinese New Year festival were concentrated in February this year, Mark Williams and Qinwei Wang of Capital Economics pointed out.
“The resulting distortions pushed export and import growth up sharply in January and will have dragged it down again in February, resulting in a possibly very large (but, we think, short-lived) trade deficit,” they added.
Therefore, the averages for January and February provide a better clue to the state of demand. Exports rose 10 percent year over year in the first two months of the year, compared with 9.4 percent in the last quarter of 2012.
Growth is coming from the emerging world. The fiscal drag in the U.S. and continued recession in the euro zone may slow China's foreign trade in the months ahead.
A report from the National Development and Reform Commission, China's top economic planning body, said that the country will strive to increase the total foreign trade volume by about 8 percent in 2013, lower than the 10 percent target last year but higher than the real growth of 6.2 percent in 2012.
March 9 -- Consumer Price Index and Producer Price Index: The Chinese New Year festival affects inflation too. Food prices typically rise before the Chinese New Year and fall back afterward. The seasonal effect likely has driven the consumer price inflation much higher in February. The headline inflation looks likely to have spiked above 3 percent year over year, compared to January’s 2 percent increase.
Meanwhile, economists expect producer prices to fall 1.5 percent from a year earlier, compared to a 1.6 percent drop in January.
March 9 -- Industrial Production: Economists expect growth in China’s factory output for both January and February -- combined to smooth out the impact of the Chinese New Year -- to show an increase of 10.5 percent on year, broadly stable at the end-2012 rate.
March 9 -- Fixed-Asset Investments: China's economic planning agency said it aims for fixed-asset investment growth of 18 percent this year, an acceleration from last year's target, indicating that China is still highly reliant on investment to drive growth. FAI grew 20.6 percent last year, above the 16 percent target of the National Development and Reform Commission.
March 9 -- Retail Sales: Economists are not very optimistic about retail sales, which is expected to slow to a slower increase of 15 percent in the first two months of this year, after rising by 15.2 percent in December.
Sales appeared strong in late 2012, partly due to spending by businesses and the government rather than by households, Williams and Wang said. Recent campaigns calling for officials to be more frugal may have curbed government spending in the New Year period.
Data already released show that holiday sales were 14.7 percent higher than last year -- the second weakest increase since 2004.
March 10-15 -- Bank Lending: Bank lending surged in January, as is usual at the start of the year. It normally drops back in February, but this year policymakers also seem to be trying to engineer a slowdown in credit growth.
The People’s Bank of China signaled in its resumption of repo operations in February that policy is set to be tightened. And its open market operations pushed the key 7-day repo rate above 4 percent at the end of the month.
Economists forecast that Chinese banks may have extended 750 billion yuan in new loans in February, down from 1.07 trillion yuan in January. Meanwhile, the broader measure of M2 money supply likely grew 15.1 percent in February from a year earlier, slowing from January's 15.9 percent.
Annual growth in outstanding yuan loans is seen easing to 15.3 percent in February from 15.4 percent in January.