Monthly economic review of the Chinese economy: April 2010 update

In March 2010 China recorded the first monthly trade deficit since May 2004, undermining US pressures on China for a stronger currency. Meanwhile, the government’s efforts to curb excessive credit are taking effect, as both bank lending and fixed asset investment saw slowing growth in the first quarter of 2010.

Summary

In March 2010 China recorded the first monthly trade deficit since May 2004. Imports rose 66.0% year-on-year during the month while exports rose 24.3% year-on-year, resulting in a trade deficit of US$7.2 billion, well above forecasts. This reflects increasing strength in domestic demand led by aggressive fiscal and monetary stimulus.

Meanwhile, FDI inflows into China rose by 7.7% in Q1 2010 over a year earlier, indicating strong investor confidence in the economic outlook for China. In Q1 2010, the Chinese economy grew at an annual rate of 11.9%, compared to the 6.2% annual growth recorded in Q1 2009.

On the other hand, both bank lending and investment in fixed assets saw slower growth in Q1 2010, reflecting the government’s efforts to curb excessive credit amid concerns of rising inflation and asset price bubbles in 2010. Inflation reached a 16-month high in February 2010, when consumer prices climbed by 2.7% over a year earlier. In the whole Q1 2010, consumer prices increased by 2.2% over a year earlier.

Foreign trade

According to the statistics from the General Administration of Customs, China’s exports were valued at US$112.1 billion in March 2010, up by 24.3% year-on-year, while the imports rose 66.0% year-on-year to US$119.4 billion.

This resulted in a trade deficit of US$ 7.2 billion, which is well above forecasts for a US$390 million trade deficit, and is the first monthly trade deficit for China since May 2004.

The government pointed out that March’s trade deficit was the result of a positive expansion of imports (owing to the steady growth of the Chinese economy and strong domestic consumption) rather than through an exchange rate policy, since the value of the renminbi has been kept relatively stable.

The government argued that this is evident of the fact that China adheres to open market principles and does not intentionally pursue a trade surplus – something which will undermine US efforts to force China to release its currency from its dollar peg and allow it to appreciate. The Chinese government predicted in March 2010 that it will take two to three years for Chinese exports to rebound to the level of 2008, before China was hurt by the global financial crisis.

Previously, in February 2010, exports rose 45.7% from a year earlier to US$94.5 billion. The annual increase in February was for the third consecutive month, and the fastest annual growth in three years. Orders from the USA, the EU and Japan accounted for almost half of the growth during the month.

Total value and monthly growth of exports of selected goods: February 2010

US$ million % change over previous month
Petroleum products 1,002 -40.4
Medical and pharmaceutical products 766 -5.2
Steel products 1,935 -13.1
Rolled aluminium 401 -34.0
Lined telephone sets(incl. cordless phone) 2,406 1.3
Colour TV set (incl. CKD and SKD) 731 -7.4
Electric wire or cable 751 -12.8
Garments and clothing accessories 8,071 -19.2
Shoes 2,226 -20.1
Plastic articles  1,142 -14.9
Toys  513 -10.1

Source: National statistics. Note: February 2010 is the latest month for which detailed exports data are available.

Also in February 2010, imports jumped by 44.7% over a year earlier to US$86.9 billion. February’s increase in imports was led by crude petroleum import, which rose by 184.6% over the same month of the previous year to US$10.4 billion, as Chinese factories started to step up production.

Total value and monthly growth of imports of selected goods: February 2010

US$ million % change over previous month
Natural rubber 337 -20.0
Synthetic rubber 282 -6.0
Synthetic fibres for textiles 54 -21.2
Coal 1,211 -18.4
Crude petroleum 10,384 10.4
Petroleum products 1,702 9.7
Medical and pharmaceutical products 406 -18.8
Plastics in primary forms 2,752 -19.6
Steel products 1,275 -14.9
Unwrought copper(incl. copper alloy) 1,845 13.9
Rolled steel 496 -1.2
Unwrought aluminium (incl. aluminium alloy) 60 -42.9
Rolled aluminium 186 -13.3
Automobiles and chassis 1,409 -35.5

Source: National statisticsNote: February 2010 is the latest month for which detailed imports data are available.

Foreign direct investment

In the first quarter of 2010, FDI inflows into China rose by 7.7% over the same period of the previous year to reach US$23.4 billion. In March 2010 alone, FDI inflows reached US$9.4 billion, up 12.1% over the same month of the previous year. In February 2010, FDI inflows rose 2.2% year-on-year (to US$6.0 billion), slowing from an 8.7% year-on-year rise in January 2010, when FDI totalled US$8.2 billion.

However, China’s statistics in the first two months of the year are distorted by the Lunar New Year holiday, which in 2010 fell in February and resulted in fewer working days. Analysts are generally of the view that rising FDI in the first quarter of 2010 signals strong and growing confidence in the economic outlook for China.

Fixed asset investment

Both bank lending and investment in fixed assets saw slower growth in Q1 2010, reflecting a shift in government policy, with Premier Wen Jiabao telling the National People’s Congress in March that “the launching of new projects must be strictly controlled” during 2010. In Q1 2010, China’s fixed-asset investment reached RMB3.5 trillion, an increase of 25.6% over a year earlier, below the 29.1% annual growth recorded in the same period of the previous year.

In the first quarter of 2010, Chinese banks RMB2.6 trillion (US$381 billion) in new loans, according to data from the People’s Bank of China (PBC), the central bank. The figure represents a 43.0% drop over the same period of the previous year as the government exerts efforts to clamp down on new loans amid fears of economic overheating and asset price bubbles.

Back in January 2010, the PBC ordered commercial banks to hold more reserves and also set a limit for lending for the whole of 2010 of RMB7.5 trillion, well below the record RMB9.4 trillion (US$1.4 trillion) lent in 2009.

Industrial production

China’s producer price index (PPI) of manufactured goods – a major measure of inflation at the wholesale level – rose 5.9% in March 2010 from a year earlier, accelerating from a 5.4% annual increase in February 2010.

The government has repeatedly stressed that macroeconomic policy will begin to focus on balancing the need to maintain stable growth, to adjust economic structures, as well as to manage inflationary expectations.

In Q1 2010, industrial output expanded 19.6%year-on-year, significantly above the 5.1% year-on-year growth recorded in Q1 2009. For the full year of 2009, China’s industrial production grew by 11.0% year-on-year, compared to an annual growth of 12.9% in 2008. China’s industrial production growth has mainly been driven by increased demand as part of the government’s stimulus package.

Retail sales

Retail sales rose 17.9% year-on-year to reach RMB3.6 trillion in Q1 2010, 2.9 percentage points higher than the annual growth rate recorded in the same period in 2009. The steady growth in consumer spending was bolstered by renewed subsidies for purchases of automobiles and home appliances during 2010 as well as lifted by the Lunar New Year celebrations.

Urban consumer spending, which is the main driver of China’s consumer expenditure, grew by 18.4% year-on-year during Q1 2010 to reach RMB3.1 trillion. Meanwhile, in rural areas, consumer spending rose by 15.4% year-on-year to RMB580.3 billion.

Inflation

In Q1 2010, the consumer price index (CPI) – a main measure of inflation – climbed by 2.2% over a year earlier, driven primarily by food price hikes. During the quarter, food prices rose by 5.1% due to a cold spell in February and rising consumer demand during the Lunar New Year festivities. Consumer prices rose by 2.3% in the cities, slightly lower than the 2.4% annual inflation rate recorded in rural areas where food prices increased more.

Price index of main consumer goods in major cities in China: March 2010

Annual % change Overall index Food Tobacco, liquors & related articles Clothing Medical treatment, healthcare & personal articles Traffic & communications Residence
All city average 2.3 5.2 1.8 -1.1 2.5 -0.2 3.4
Beijing 0.9 3.9 0.7 -1.7 0.8 0.7 0.5
Tianjin 3.1 7.3 4.4 2.9 2.8 -1.2 0.5
Shijiazhuang 2.3 3.7 0.0 2.9 3.2 -0.8 3.5
Harbin 4.8 8.2 5.3 3.0 7.8 -1.0 4.0
Shanghai 2.1 5.4 1.7 -3.3 3.1 -0.4 3.7
Nanjing 2.4 4.3 2.0 4.2 3.2 -1.6 2.6
Hangzhou 2.7 5.4 1.1 -2.4 5.2 0.0 3.1
Ningbo 3.1 6.0 -0.8 -0.7 5.4 1.2 5.3
Fuzhou 2.6 4.8 1.6 2.6 4.1 -1.7 2.3
Xiamen 2.3 6.2 2.8 -7.3 4.2 2.4 2.7
Nanchang 3.0 3.8 0.0 -1.9 3.5 -1.6 11.9
Jinan 1.2 5.2 2.2 -5.0 1.9 -1.3 1.1
Qingdao 1.8 4.6 2.5 1.3 1.6 -1.0 1.1
Zhengzhou 1.9 5.7 0.9 0.1 1.9 0.0 0.2
Wuhan 1.9 2.9 1.7 3.7 2.3 0.4 1.4
Changsha 2.0 3.7 0.6 0.6 -0.2 1.1 4.8
Guangzhou 2.2 3.3 2.5 1.4 2.7 0.5 5.1
Shenzhen 3.0 6.2 1.6 0.4 4.2 0.1 3.8
Nanning 0.7 2.9 0.1 -6.5 -0.7 1.0 6.5
Haikou 3.5 5.2 1.3 0.2 1.5 1.3 6.4
Chongqing 1.4 3.0 4.1 -0.6 1.4 -0.9 2.1
Chengdu 0.8 2.7 1.2 -6.3 4.6 0.9 0.7
Guiyang 2.4 4.2 0.5 0.4 2.6 -0.1 1.4
Kunming 5.3 10.2 -0.8 -0.6 5.0 0.2 6.9
Lanzhou 2.6 7.3 6.5 -1.7 2.5 -2.0 3.3

Source: National statistics.