Forex Investment and Currency Trading

Summary: July data show a mixed performance of major activity indicators (China is now releasing most monthly data in one tranche each month). The highlight is further signs of rebound in private spending, supporting the view of a sustained growth recovery. The slightly weaker-than-expected July data, with slower FAI growth offset by strong retail sales growth, suggest balanced risks to market’s 8.3% growth projection for 2009.

Analysts continue to believe that quantitative measures (open market operations, moral suasion and possibly a reserve requirement hike) will be the main tools used by the PBoC to tighten liquidity and limit asset-price inflation risks. The pace of tightening will depend upon the data released over the next few months, but analysts do not expect a hike in the benchmark deposit and lending rates until H2 10.

Industrial production grew a weaker-than-expected 10.8% y/y in July, albeit still up from 10.7% in June and 8.9% in May. Owing to low year-earlier base, market expects the y/y IP growth to rise further in H2 to reach 18% towards year-end.

Monthly fixed asset investment growth fell to 29.7% y/y in July from 35.3%, bringing the YTD figure to a lower-than-expected 32.9% from 33.6% in June. The size of the moderation in FAI growth was a little surprising, and possibly reflected the sharp fall in new lending in July. While overall FAI growth has moderated from the high level in Q2, growth in real estate investment (accounting for 20% of total FAI) recovered further to 19.6% y/y, compared with 18% in June and 1% during Jan-Feb. Given the significantly negative y/y PPI inflation, real FAI growth was markedly stronger than the nominal figures.

Helped by rising consumer confidence and government policies to promote purchases of home appliances and vehicles, private consumption growth remained robust in July. Growth in nominal retail sales edged up further to 15.2% y/y from 15.0% in Q2, in line with the expectation, while real retail sales rose at a YTD-high of 17.3%, slightly below the three-year-high of 17.6% recorded in Q4 08. July auto sales (1.08mn units) fell slightly from June (1.14mn units), partly reflecting the traditionally slow summer sales season, while the underlying momentum remains strong and may even have accelerated. On a y/y basis, auto sales surged 63% in July, up from a three-year-high of 32% in Q2. In particular, passenger car sales (75% of total sales volume) soared 70.5% from a year ago, up from 44% y/y in Q2. Commercial car sales climbed 42.4% y/y in July, up from 6% in Q2, adding to the evidence of a recovery in business spending.

The July CPI and PPI inflation remained negative, owing to a high base effect. In contrast to expectations, the rate of CPI inflation became more negative, to -1.8% , from -1.7% in April. The m/m CPI increase remained at 0.1%, led by higher food prices, such as prices of pork, which was up 9% m/m in July. Market believes CPI inflation likely bottomed in July and should return to positive towards year-end as high base effects gradually taper off. The decline in the PPI inflaiton rate accelerated to -8.2% y/y from 7.8% in June, driven by a large decline in raw materials purchasing prices.

Mainly reflecting high base effects, the y/y decline in exports widened to 23% versus 21.4% in June. On a 3m/3m saar basis, export growth stayed positive for the second consecutive month in July and rose to a strong 9.2% following June’s 0.9% increase. With a stabilising external demand and dissipating base effects, market expects a decent rebound in y/y export growth in H2. The y/y decline in imports widened to 14.9% in July from 13.2% in June, but was still significantly stronger than the drop of 20% in Q2, reflecting the continued strong pick-up in domestic demand, in particular infrastructure and construction spending.

Monthly new loans declined sharply, and by a greater extent than expect, falling to CNY355.9bn in July from June’s CNY1.5trn. This partly reflects moderation from June’s high level, which was boosted by banks’ quarter-end lending, as well as recent central bank open market operations and moral suasion on banks, including targeted issuance of central bank paper to banks that recorded relatively fast credit expansion in recent months. While the slowdown in new lending may have contributed to the moderation in FAI growth, its impact on overall economic growth may not be as large as perceived, considering the still-loose monetary conditions and the term structure of the loans. Money supply growth edged down in July, credit growth also moderated. As growth in new lending slows, analysts expect stabilising broad money growth in Q3.