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China's exports and imports surged and new lending soared in January as the first hard data of the year signalled not only a solid recovery in domestic and overseas demand, but also the risk that inflationary pressures are building.
Exports grew 25 per cent from a year earlier versus a forecast of 17 per cent in a Reuters poll. Imports surged 28.8 per cent to comfortably beat a consensus call of 23.3 per cent and the resulting $29.2 billion trade surplus topped a market expectation of $22 billion.
New lending by China's banks in January beat expectations at 1.07 trillion yuan ($172 billion) and more than doubled from December. Total social financing — a broad measure of liquidity in the economy — leapt to 2.54 trillion yuan, well ahead of December's 1.63 trillion yuan.
Economists were cautious about reading too much into one month's data undeniably distorted by the timing of Lunar New Year holidays, which fall in February this year but were in January in 2012. Still, the consensus view suggested an economic recovery that started in late 2012 was strengthening.
“Overall this says there is no need to worry about the strength of China's recovery,” Sun Junwei, China economist at HSBC in Beijing, told Reuters.
“These were very strong numbers, particularly total social financing. This means to me that beyond the rebound in bank lending there is strong demand for credit in the economy,” Sun said, predicting upside surprises to data ahead.
After seven straight quarters of a slowdown, growth picked up in the fourth quarter. Still, 2012 marked the slowest year of growth for China since 1999.
The stronger-than-expected exports also pointed to signs of a recovery beyond China's borders in the giant economies of the US and the European Union.
January's consumer inflation fell to 2.0 per cent from December's seven-month high of 2.5 per cent, suggesting price pressures are subdued for now.
Economists expect inflation to gather steam through the first quarter, though likely staying below 3.5 per cent in 2013, a level they think the government will soon announce as its target.
The overall strength of the data underlines a more cautious line being taken by the central bank, which indicated a shift in its policy back towards inflation risks from growth in a fourth-quarter monetary policy report on Wednesday.
“As the economy transits into another stage of growth, economic controls need to always emphasise containing inflation risks,” the People's Bank of China said.
Yao Wei, an economist at Societe Generale in Hong Kong, agrees there is reason to worry, pointing to January's 2.9 per cent year-on-year rise in food prices.
CPI rose 1.0 per cent in January from December, ahead of the 0.9 per cent Reuters consensus forecast and the strongest monthly gain since January 2012. In fact, 90 per cent of the increase was due to rising food prices, said Yu Qiumei, a senior statistician at the National Bureau of Statistics.
Apart from higher state investment as a potential source of inflation, the housing market is showing signs of strength once again as prices climb towards record highs despite curbs to try to cool the market.
Money supply trajectory
The trajectory of money supply is key against that backdrop, with investors focusing on bank lending to try to assess the bias of monetary policy as loans are made at Beijing's behest in the state-directed financial system.
The market consensus is for the PBOC to keep policy settings neutral through 2013 to ensure an economic recovery is well-entrenched. The policy risk appears to be shifting towards tightening, rather than easing, if the strength of domestic and external demand implied in January's trade data is more than a quirk of base effects.
“I think the Chinese New Year effect only explains part of the story,” Zhang Zhiwei, chief China economist at Nomura in Hong Kong, told Reuters. “After controlling for the Chinese New Year, the numbers are still very strong and show the economic recovery is on track."
China's year-on-year exports growth to the United States of 14.5 percent was the strongest in 10 months, while the rise in exports to the European Union were the highest in 13 months at 5.2 percent.
Exports to China's neighboring economies in the Association of South East Asian Nations (Asean) leapt 48.6 per cent versus January 2012, worth $20.1 billion.
External demand appeared strong, even adjusting for the five additional working days the Customs Administration said were included in its January 2013 data versus January 2012. Exports rose 12.4 per cent after adjusting for the holiday factor while imports rose 3.4 per cent.
China publishes the bulk of its economic data for January and February combined in March to smooth the effects of the annual shift in the Lunar New Year holidays when many factories shut for at least a week and often longer.
The strength of imports and what that implied for the health of the domestic economy that was most telling to Tao Wang, China economist at UBS in Hong Kong.
“It seems to me that imports were particularly strong and that reflects two things: one is that the domestic demand, in particular investment demand, is very strong. The second thing is that it seems that companies are restocking ahead of the Chinese New Year and ahead of the peak season in March and April,” she said.
Imports from the US soared 49.7 per cent, those from Asean jumped 36.5 per cent and imports from the European Union rose 20.7 per cent. Imports from Taiwan rocketed 74.8 per cent, making the 12.9 per cent rise in imports from Australia look anaemic.
Ting Lu, head of Greater China economics at Bank of America/Merrill Lynch, was particularly cautious in his reading of the trade data, noting that import prices were rising in tandem with China's recovery. Iron ore, for example, has surged 79 per cent from September 2012 — the bottom of China's 2012 growth cycle.
Lu forecasts 2013 export growth unchanged from the 7.9 per cent pace in 2012, but thinks import growth could rise to 11.5 per cent from 4.3 per cent in 2012 as prices rebound.
