This week the focus is on China and global monetary policy. First up we look at China's vital stats for February: inflation, retail sales, industrial production, and international trade. Some of the data is a little distorted due to the holiday season in China, but there are still some interesting insights. Finally we check out some of the seven interest rate changes that various central banks around the world announced over the past week.
1. China Inflation
China reported inflation of 4.9% in February, the same figure as in January. The figure was largely driven by food price inflation, with the prices of foodstuffs rising 11.0% but with non-foodstuffs also showing signs of life, rising 2.3% year on year. The other key category was housing, which rose 6.1%, showing the Chinese housing market is still chugging along, with a mind boggling rate of new buildings under way (e.g. the government's 10 million unit social housing program). Overall, food prices are still the key driver, so it will be interesting to see whether food prices may normalize following some of the short-term supply disruptions. But there are also significant wages, capacity, and aggregate demand aspects to inflation, so it's likely that the People's Bank of China has some further tightening up its sleeve.
Click to enlarge charts
2. China Retail Sales
February retail sales slumped as expected due to the seasonal effect of the Chinese new year holiday period. However the February figure alone was higher than September 2010 (1.38 trillion yuan vs 1.35 trillion), so the upward trajectory is still firmly entrenched. And it's unsurprising, over the past 5 years urban per capita incomes have doubled to about 20,000 yuan in the 2010 year. The only thing to watch, though, is the rate of growth has tapered off a bit - this will be a key indicator to monitor over the next few months.
3. China Industrial Production
China recorded growth in industrial production of 14.9% year on year in February (compared to 12.8% growth in February 2010). In terms of sectors, the fastest growing were General Purpose Machinery (22.8%), and Nonmetal Mineral Products (18.9%), while the slowest growing sectors were Textiles (8.5%), and Transport Equipment (12.8%). So the message was, basically China's industrial engine is still running strong, and the PMI figures have flagged this. February PMI was about 52 on both measures - indicating expansion. Industrial production is likely to continue to find strength from export demand, property construction demand, and government infrastructure spending demand. But to be sure, over time industrial production will increasingly find strength from domestic demand, e.g. in the case of car sales - with massive sales of automobiles in China.
4. China International Trade
On international trade, China reported lower volumes and a -$7.3 billion deficit as seasonal factors bit into trade volumes. However, looking through the seasonal factors, on a rolling quarterly basis, and compared to last year, here's how it would stack up: in the 3 months to February 2010 exports were $400m vs. $335m, imports were $390m vs. $295m, and the surplus was $12.5m vs. $40m. So the volumes are definitely up, but there is some tangible reduction in the trade surplus. Of course some are pointing to this alleviating some of the Yuan debate in the short term, but the PBOC is already starting to acknowledge the role of the Yuan in managing inflation, so watch this space.
5. Monetary Policy Review
On monetary policy, those that raised interest rates included: Thailand +25bps, Kazakhstan +50bps, Korea +25bps, Serbia +25bps, and Peru +25bps. Meanwhile New Zealand -50bps and Trinidad & Tobago -25bps reduced their main policy rates. The rate cuts were the exception, and New Zealand even more of an exception, as the move was motivated as a response to the earthquake. For the most part, though, the theme was a collective desire to anchor inflation expectations and avoid the second round effects of rising commodity prices. The UK notably didn't do anything, in contrast to the ECB - which suggested rates could rise as early as April. But then we won't be able to know their rationale until the Bank of England meeting minutes come out in a week or so.
So we saw inflation remaining high in China, which affirms suspicions around a swath of fundamentals that point to broad-based inflationary pressures. On retail sales, consumer spending maintained upward momentum overall, despite the seasonal effects of holidays. Likewise, industrial production showed no let-up, with a variety of factors supporting further strength in China's industrial engine over the medium term. As for international trade, a few quirks saw China report a trade deficit in February, but that's likely to quickly reverse, but there are some interesting trends unfolding. Looking more broadly at the world, the main theme of monetary policy decisions over the past week was the old chestnut of emerging market inflation, with banks looking to preempt second round effects of rising commodity prices. Question is, when's the PBOC's next move?