www.danskeresearch.com
Investment Research
—
General Market Conditions
Today’s fixed asset investment data for May were much stronger than expected. Together
with soaring home and car sales, they suggest that domestic demand in China is currentlyvery strong.
While this is obviously very positive for the global economy and not least the rest of Asia,there will soon be a need to rebalance economic policy in China to prevent another assetbubble developing.
Details
Several data releases in recent days suggest that domestic demand in China has gainedconsiderable strength. Importantly this does not appear to be just a temporary impact from the
government’s massive fiscal easing. It increasingly looks like the private household
sector isstarting to respond to easier financial conditions in China.According to data released earlier today,
Fixed Asset Investment
(FAI) accelerated further inMay in the wake of the extraordinarily strong credit growth since the government abolishedcredit controls last autumn. Data released yesterday showed very strong increases in
plannedinvestments
and
newly started projects
in May were up close to 75% y/y (see chart on thenext page). Hence, the investment side of the Chinese economy looks very strong at themoment.Data released yesterday suggest that the housing market has finally turned the corner.
Homesales
have increased sharply in recent months and seasonally adjusted sales have doubled sincelate last year. While
house prices
are still down 1% y/y, they are now increasing sequentiallymonth on month.
Passenger car sales
accelerated further in May, supported by lower autotaxes and subsidies for environmentally friendly cars and are now up about 30% y/y (see charton next page).Finally tod
ay’s May
foreign trade data
showed continued strong gains in import volumessupporting the picture of a strong domestic economy in China, see
Assessment & Outlook
It is increasingly clear that China has been very successful in boosting domestic demand. Atthe moment we think there is increasing upside risk to our forecast for 7.9% GDP growth in2009. This is obviously very positive for the global economy and not least the rest of Asia.However, some of the movements in e.g. house and passenger car sales are starting to look quite extraordinary and at some stage the Chinese leadership will have to start to ask itself whether it is just building the foundations for the next asset bubble and possible new wave of bad loans in the banking sector.While the Chinese leadership (with some justification) can claim mission accomplishedregarding being able to manage a soft landing, we believe there will soon be a need torebalance this policy. For that reason we expect the People
’
s Bank of China to start tighteningmonetary policy in H2 09. In addition we believe that a combination of robust domesticdemand and only a modest output gap is a strong appreciation case for CNY.
11 June 2009
Senior Analyst
Flemming J. Nielsen+45 45128535flemm@danskebank.dk
Flash Comment
China: Domestic demand roaring ahead
Fixed Asset Investment, May (% )
May Con AprilYTD, % y/y 32.9 31.0 22.6% y/y*, 38.7 - na 34.7% m/m*, sa 6.0 na 0.6
Source: Reuters Ecowin, Bloomberg and *owncalculations
Credit easing has boosted fixed investments substantially
98 99 00 01 02 03 04 05 06 07 08-10010203040506070010203040y y
<<Fixed asset investment
% y/y
Credit>>
Source: Reuters EcoWin and own calculations
Chinese housing market is recovering
05 06 07 08 0920000400006000080000100000-5.00.05.010.015.0
House sales
mio. sqm
<< House prices% y/y
Source: Reuters EcoWin and own seasonal adjustment
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