Phat dragon

13 April 2012

# 103a

a weekly chronicle of the Chinese economy

• Phat Dragon’s forecast - put forward with the usual amount of
trepidation and a lavish helping of caveats - wasn’t too far from the money in the end. The economy reportedly expanded 8.1% from a year ago in Q1 (consensus 8.4%, Phat Dragon 8.2%, lower bound of the credible forecast range 7¾%) down from 8.9% in Q4 and 9.7% at this time in 2011. The slowdown in real GDP is significantly milder than that observed across a broad range of other indicators of activity, but a volume deceleration of 1.8ppt over a year is certainly not a trivial one. In nominal terms the scale of deceleration is much larger, reflecting the disinflationary state imposed by the austere policy environment through 2011. Nominal GDP reportedly expanded by 11.2%yr in Q1, a steep decline from 16.6% in Q4 and 17.5% a year ago. The implicit price deflator is now just 3.1%yr, having been as high as 9% just two quarters ago. A sharp downward move in the fixed investment deflator (from 5.7% in Q4 to just 2.3% in Q1) was a key contributor there. In the quarter itself, the NBS estimates that the seasonal adjusted growth rate was 1.8%. Phat Dragon has historically tended to be dismissive of these estimates. Some things never change.
16 14 12 10 8

Chinese GDP & the money supply
Sources: Westpac Economics, CEIC



GDP (lhs) M2 (rhs)




6 10 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Dec-13

Various measures of inflation
15 10 5 0
Fixed investment price index

Sources: CEIC, Westpac Economics.


15 10 5 0

• On the broadest sectoral basis, Phat Dragon notes that primary,
secondary and tertiary activity are all now expanding at single digit paces. That was the case for five quarters beginning in Q3 of 2008 and it was the norm for the bulk of the Asian Crisis-banking crisis-tech wreck phase either side of the turn of the millennium. Otherwise, it just hasn’t happened. While one can certainly argue that the slowdown is not deep it is certainly broad.


Consumer price index GDP implicit price deflator

-5 -10

• As noted above, the deflator for capex slowed quite abruptly in

Producer price index

Q1. Phat Dragon puts real fixed investment at 18.8%yr in March, against a nominal pace of 21.1%. The nominal value of projects under the auspices of local government have slowed from above 30% last November to 23% in March while central projects remain in negative growth territory. In terms of sectoral trends, manufacturing slowed, utilities firmed and transport narrowed the rate of contraction carried from last year. Residential real estate slowed, with the nominal ytd rate below 20% for the first time since December 2009. The volume of construction starts are now contracting year-over-year (–4%), joining sales (–13%), while completions are up (rhetorical pause) 32%.

-10 Mar-04Mar-05Mar-06Mar-07Mar-08Mar-09Mar-10Mar-11Mar-12

Key indicators: pace of slowdown easing
30 25 20 15 10 5 0 -5 -10 -15
Sources: Westpac, CEIC. All indicators in volume terms except for imports and exports, which are nominal USDs.

Dec-10 Dec-11


30 25 20 15 10 5 0 -5 -10 -15

• Industrial production was basically steady at 11.9%yr in March,

while Phat Dragon’s core index is showing signs of consolidating in the mid to high single digit range, with a 5.8% outcome across Q1. Steel, energy and cement volumes have steadied around 7-8%. Automobile output is bouncing around in the low single digits while sales are basically flat in terms of unit growth, while the annualised level of sales is around 17¼ million, which is a touch below the average of 2011H2. Retail sales, a series that does not have Phat Dragon’s seal of approval, came in at 14.8%ytd, a moderate firming from February. Given that food prices accelerated in March, it is safe enough to allocate the gain to a nominal effect on the price of staples, rather than a discretionary rise in spending.
– Economic Research –

Real GDP Core IVA





Real fixed Housing Auto sales investment sales

• The overall picture is of an economy that is in need of a more
accommodative policy stance - the new evidence in favour of Phat Dragon expounded in this morning’s chronicle.

• Stats of the week: The share of China’s oil imports coming
from Africa rose by 23ppts in the ten years from 1995.

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