With the recent developments and updates, the global market has received some surprises with China revealing better than expected consumer prices for September 2016. Let us have a look at the strength of Chinese key economic factors.
Consumer price index rose 0.7%: Consumer price index (CPI) rose 0.7% from the previous month, which is higher as compared to the prices which rose from August’s 0.1% increase. This is seven-month high, mainly supported by a sharp increase in prices for education, culture and recreation as well as food particularly fresh vegetables, tobacco and liquors. In China, most important components of the CPI basket are food (318% of total weight) and Residence (17.2%), while Recreation, Education and culture articles account for 13.8% and Transportation and Communication for 10%.
Inflation rose from August’s seven-month low:China’s inflation stepped up in September with prices rising more than expected for both producers and consumers in a surprising strength of an economy. Inflation rate (consumer prices) rose from August’s seven-month low of 1.3% to 1.9% in September. This level was seen to beat the market expectation of 1.6%. Annual average growth in consumer prices was stable at August’s 1.8% in September. Accordingly, inflation has been well below the government’s target of 3% for the year.
Inflation data (Source: National Bureau of Statistics of China, NBS)
Producer price index up:Producer price index (PPI) grew for the first time in nearly six years in September expanding 0.1% from the same month of year 2015. This is against August fall of 0.8% as well as the market expectation of fall of 0.3%. The annual average variation of the producer price index decreased from August’s minus 4.1% to minus 3.6% in September, which is highest reading since June 2016. PPI had been improving and this time it turned positive. That showed that the capacity consolidation has been doing some progress. This will be helpful at least for manufacturing sector.
China factory activity expands: Activity in China’s manufacturing sectors expanded again in September (survey analysis), which indicates that recent positive momentum can be sustained. The official Purchasing Manager’s Index (PMI) was reported to be at 50.4 in September identical with previous month’s level. After significant pick up in March, China official PMI slipped, falling below 50 in July before showing expansion in August. New export order increased in September rising to 50.1 from the previous month’s 49.7. September output edged up to 52.8 from 52.6 in August but the index for total new orders slipped from 51.3 to 50.9. A sub index for smaller firms fell, while performance at larger companies improved. This is a sign that the government’s dependence on big state firms for growth this year has not changed.
Service sector expanded:China’s service sector expanded at a slightly faster pace with official reading at 53.7 in September from 53.5 in August. A measure of construction industry rose as the government is increasing its spending on infrastructure.
Poor exim data: The price data followed signs of slowing activity on the mainland. China’s export fell 10% in dollar terms in September and imports fell 1.9%, well below consensus expectations. The data could signal waning demand in China and abroad, potentially weighing on China’s economic growth.
Unemployment is increasing: Jobs were lost at a slower pace with the employment sub-index rising to 48.6 compared to 48.4 in August. The services employment sub-index rose in September, but still indicated services companies were cutting staff. Job loss could be rising as the government has pledged broad capacity cuts across a range of industries.
Impact on Australian currency: Considering that China is a key export market for Australia, the Australian dollar had moved up with the release of the data, rising as high as $0.7603 compared with around $0.7553 before release.
Outlook
The current rise in inflation is expected to support China’s ability to service its overhang of corporate debt, if maintained appropriately. Higher prices for heavy industrial products will provide China’s heavily indebted corporations with more top line revenues. With rise in producer prices and low interest rates that help in keeping debt service costs in check, the outlook for Chinese industrial profits is said to be trending better. Economists are of the view that pattern over the few months suggested sustained economic growth, but a growing dependence on government spending and overheated property may pose increased risk in short term considering the current debt levels. Lately, what we saw was that China’s slowing economy and problems with industrial over capacity resulted in lower investment opportunities. This was at the back of the private investments moving up only 2.1% in the first eight months of the year, which still indicates that the same have been maintained at record low levels.
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