Economic Analysis: China Losing Steam

Today China released its inflation data for August and the numbers were not rosy. Consumer inflation came down and wholesale prices fell off sharply. This is clouding and already murky economic outlook for the world’s second largest economy as it is losing steam.

Consumer prices (CPI) was down two percent in August. This was below the 2.3 percent rise in July and missed the consensus of 2.2 percent increase. Beijing has an inflation target of 3.5 percent. The other half of the coin, producer prices, continued its contraction, its deflationary spiral down. We saw this dip 1.2 percent after coming in at negative 0.9 percent in July. We expected it to come in at -1.1 percent. Producer prices (PPI) have been falling off since February of 2012. This is thanks to falling commodity prices, overcapacity and a fall of in global demand. Data continues to convince us that the economy in China continues to slow.

PPI numbers are worsening and moving in a deflationary direction. We have definite signs of overcapacity as well as oversupply problems. The property sector, the growing bubble here, is also effecting upstream industries. These industries are feeling the crunch and it is showing in the PPI. With this, the gross domestic product (GDP) also is slowing. Its last print came in at 7.4 percent. This is the slowest growth rate in six quarters. In Q2, GDP inched up to 7.5 percent but, data since then, is painting a bleak picture for the future.  We are seeing weak credit inflows, weaker manufacturing and a dark picture in the real estate market.

Policy makers, in Beijing, have been enacting measures to support the economy. They have introduced some small and targeted easing measures but economists are beginning to wonder if they should get more aggressive. There have been no major rate cuts. If the data continues to come in soft, we could come in under the targeted GDP which is at 7.5 percent by 0.1 to 0.2 percent below. Could see Beijing become more aggressive with a more dovish economic policy stance? Premier Li Keqiang, who spoke last week, said China will not initiated monetary easing in the near term.

He says that money supply is at high level and China cannot rely on monetary expansion to fuel their economy. This means we can expect Beijing to continue easing policy bias to stimulate growth and lower funding costs. Major moves, for now will not happen. The government is working hard to initiate mini stimulus packages to ensure their GDP meets the target of 7.5 percent. However, the outlook for 2015 might not be that strong. Expectations are that policy makers will cut their growth outlook for next year.