by Brian Jackson, China Economist, IHS Global Insight
Key Points:
- On 11 December, the China Foreign Exchange Trade System (CFETS), a unit of the People’s Bank of China, published a notice regarding a new index to track the value of Chinese Yuan against a basket of currencies.
- Authorities calculate the CFETS index using a trade-weighted value of 13 currencies against the CNY, with a base value of 100 on 31 December 2014.
- According to two initial statements from CFETS, the index appreciated 2.93% through December 14 2015, the same value it stood at on 30 November 2015.
- Official statements emphasized that the move is consistent with indices used by other central banks, citing the Federal Reserve, the European Central Bank and the Bank of England.
- Authorities said they created the index to ‘help guide market participants to shift their focus from the bilateral RMB/USD exchange rate to the effective exchange rate.’
Significance:
China’s CFETs index demonstrates the well-known fact that while the CNY depreciated steadily against the dollar since August, it remains relatively stronger against most other trading partners. In the CFETS index, the USD is weighted highest, although even then only accounts for 26.4% of the basket, followed by the Euro and Japanese Yen.
Creation of the CFETS index, and the timing of the announcement, is a strong indicator that China will allow further depreciation of the CNY-USD exchange rate, with the index almost certainly intended to blunt competitive devaluation criticisms. The US Federal Open Market Committee will meet on 15-16 December, and is widely expected to raise interest rates which in turn will encourage USD appreciation.
GDP improvement in China, although slowing likely to resume early in 2016
Key Points:
- Besides real estate, most economic indicators in China improved in November, particularly investment growth.
- China’s efforts to stabilize growth via fiscal policy support for investment and consumption are generating results, increasing upside risk for Q4 GDP growth.
- While the November data point to Q4 growth exceeding expectations, sequential growth indicators remain supportive of slower GDP growth early next year, consistent with IHS’s current 2016 outlook.
Industrial Production:
- Chinese industrial output growth accelerated to a five month high in November. Growth accelerated in both manufacturing and utilities aggregates, but worsened in the mining sector. Of 41 sub-sectors, only 2 are in contraction, likely both sub-sectors in the mining component (full sectoral data is available later this week).
- Authorities noted that the improvement arose especially from the automobile sector – where growth accelerated 5.7 percentage points to a 13% expansion.
- State-owned and foreign invested enterprises’ (SOE & FIE) output accelerated most. SOE output growth was 2.8% compared to a 0.5% contraction the month before, while FIE output growth was 5.2% compared to 3.6% a month prior.
Investment:
- Chinese completed fixed-asset investment (FAI) growth stabilized, ending a five month deceleration. Moreover, allocated funds for new investment grew 7.9%, a modest acceleration compared to October, driven particularly by faster growth in funds allocated from central and local state budgets.
- FAI growth improved in the primary and secondary sectors. Within the secondary sector FAI growth improved in manufacturing, utilities, and construction, but an ongoing contraction in mining FAI worsened.
Real Estate:
- Chinese real estate volume indicators remained bleak in November. Sales were unchanged from a month prior, while starts contracted at a faster pace, and floor space under construction slipped into contraction
- Divergence between cities is widening again. Authorities noted that sales volumes in 40 mostly tier-1 and tier-2 cities accelerated in November, but decelerated for all other cities.
Retail Sales:
- Chinese retail sales growth accelerated for the fourth consecutive month. Authorities attributed the improvement to faster retail growth in urban areas, improved sales of merchandise goods (rather than services), and faster sales of both basic living goods and higher end consumer goods. For example, sales of clothing, household appliances and recreational goods all showed marked accelerations.
- Cumulative online sales growth was unchanged from October. While still growing at a blistering fast 33%, it is noteworthy that cumulative growth of online sales did not nudge upwards at all despite massive discounting and record-breaking volumes for China’s annual ‘Singles Day’ on 11 November.
Outlook / Implications:
China’s November data add to the case for an improvement in GDP growth during the fourth quarter of 2015. After correcting headline growth indicators for changes in prices, industrial output, investment, retail sales and exports are all in better positions than they were one month or one quarter ago.
Notably, the most substantial accelerations compared to one quarter ago are for investment followed by consumption, with the only marginal improvements for industrial output and exports. That is consistent with the key themes in China’s economy in 2015 – ample government support in the form of infrastructure investment projects, as well as efforts to stoke consumption.
Meanwhile, a marked appreciation of the Chinese Yuan against a basket of all trade partners and lackluster demand in foreign markets has sapped export growth, dragging on some manufacturing sectors while other industrial sectors focused on construction materials are facing their own set of headwinds.
Improved year-on-year growth in the monthly indicators indicates upside risk for China’s GDP in the fourth quarter. Less encouraging is that official month-on-month growth estimates in key indicators suggest that fixed-asset investment and industrial output will both moderate early in 2016, while consumption is likely to remain steady. That, coupled with the steadily eroding pipeline of new real estate projects, is consistent with further slowing in headline GDP growth in 2016 unless China markedly accelerates fiscal support.