Last night’s Chinese data deluge confirms that the economy continues to record very decent growth, albeit with the troubling side-effect that inflationary pressures are still building.
In the month of May, retail sales rose by 16.9% YoY, down from the recent peak of 19.1%. After adjusting for inflation, what has been noticeable over recent moths is a discernable slowing in real sales growth. That said, real sales growth of more than 10% is entirely acceptable and would be the envy of any advanced economy tight now. Property investment also remains relatively buoyant – home sales rose 16% in the first five months of this year. Separately, industrial production rose 13.3% YoY in May, again a healthy outcome, while fixed asset investment increased by a staggering 26%. For those looking for evidence that China is headed for a hard landing, there is scant support for their thesis in these figures.
More troubling, however, especially for policy officials, is the continued rise in inflation. May consumer prices rose 5.5% YoY, not as bad as some commentators were suggesting but still the highest for three years. According to a spokesperson for the National Bureau of Statistics, food inflation accounted for 3.5 percentage points of the 5.5% increase. The other contributor to accelerating inflation is housing costs, up 6% YoY last month. Producer prices also remain elevated, up 6.8% YoY.
Clearly, the PBOC still have more work to do in terms of constraining not just prices growth but also growth in credit availability. As a result, it is no surprise to that the PBOC has lifted the reserve requirement yet again this morning, by another 50bp to 21% for the major banks and 19% for smaller banks. Unfortunately, the myriad of reserve requirement increases announced over recent months has failed to have much impact on borrowing – indeed, it appears that these restrictions are merely pushing credit availability to the shadow of the banking system.
Higher interest rates are what is needed, and quite possibly much higher ones than currently exist. In coming months, we could expect at least 50bp, and possibly even 100bp, more tightening from the PBOC. To combat the scourge of accelerating inflation, the PBOC is likely to continue to allow an appreciating exchange rate to play a role.