Data doubts cloud China growth outlook

Concerns over an excess of capacity in the Chinese economy rose yesterday in the wake of figures that painted a benign picture of inflation and added to doubts over the reliability of the country’s official statistics.

Headline consumer price inflation (CPI) rose to 2.4% year-on-year in April, up from a brief dip to 2.1% in March, while producer price inflation (PPI) declined to a six-month low of minus 2.6% year-on-year, down from minus 1.9% a month earlier.

Economists largely ignored the CPI number, nudged slightly higher by vegetable prices due to bad weather. “Overall inflation is benign,” said Sun Junwei, China economist at HSBC.

The decline in producer prices into deflation generated more attention. “PPI’s sharper contraction continues to point to soft underlying demand and excess industrial capacity,” he said.

This is arguably the more significant point since weak domestic demand and excess capacity appear to suggest sluggish growth, which would ordinarily lead People’s Bank of China Governor (PBOC) Zhou Xiaochuan to adopt monetary easing to help the economy.

But with inflation rising, albeit modestly, that option does not appear to be open to the central bank. PBOC yesterday announced the issuance of RMB10 billion in central bank bills, the first time in 17 months the central bank had issued bills to withdraw liquidity from the open market, but economists said this was not significant in terms of broader monetary policy.

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“We maintain our view that the PBOC will maintain its neutral monetary stance, while continuing to use its open-market cannons to manage the aggregate liquidity level,” Dong Tao, research analyst at Credit Suisse, said in a note to clients.

The inflation numbers followed trade data the previous day which showed Chinese exports grew 14.7% in year to April, far higher than had been expected – Bloomberg consensus had been 9.2% – although lower than imports at 16.8%. The disparity, while welcomed by the market, raised eyebrows. Dong Tao told clients: “China’s export growth continued to deliver surprisingly high scores in recent month: this is puzzling to us.”

UBS economist Tao Wang said: “China’s exports data in the past few months, especially in Q1 2013, overstated the true strength of exports. This does not seem to have gotten much better in April.”

CEIC Data – a company part of the Euromoney Group that owns Emerging Markets – said it had received a “huge amount” of queries about China’s export and import growth data, to the extent that it sent out two separate sets of underlying trade data, excluding warehousing and logistics goods, in order to reassure the market that the numbers were credible. The company’s relationship manager Kristopher Leung told clients that “China’s April trade data are not [as] doubtful as many suggested.”

UBS’s Tao said he thought new measures from China’s State Administration of Foreign Exchange should help to curb speculative capital flows disguised under current account transactions, which ought to mean export data more accurately reflect fundamentals. “In the absence of any major negative shocks, the gradual, though bumpy, recovery in global demand should be able to support a steady growth of China exports at around 10% in the coming year.”

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