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Market Watch
Business> Market Watch
UPDATED: June 17, 2011 NO. 25 JUNE 23, 2011

AUTO SHOW: Attendees to the 2011 China Xi'an International Auto Exhibition, opened on June 15, look at a Mercedes-Benz SLS AMG sports car on display. More than 600 new auto models debuted at the six-day event (LI YIBO)

Numbers of the Week

386.5 billion kwh

China's power consumption in May rose 10.8 percent year on year to reach 386.5 billion kilowatt hours, according to data from the National Energy Administration.

$9.225 billion

China received $9.225 billion in foreign direct investment in May, up 13.43 percent from a year ago, said the Ministry of Commerce.

TO THE POINT: Inflation continues to stretch the nerves of Chinese policymakers, as CPI growth hit 5.5 percent in May, a 34-month record. In response, the central bank has ordered a 0.5-percentage-point hike of the reserve requirement ratio for the sixth time this year. On the trade front, imports maintain momentum while exports lose ground. Fixed-asset investment and consumption remain buoyant, providing a driving force for the Chinese economy. The once-feverish auto market is quickly cooling due to the expiration of policy incentives, climbing gasoline prices and purchase limits in Beijing.

May Figures


The consumer price index (CPI), a barometer of inflation, rose 5.5 percent in May from a year ago, a 34-month record high, said the National Bureau of Statistics (NBS).

Among factors in the CPI basket, food prices skyrocketed 11.7 percent year on year while residential costs went up 6.1 percent.

The producer price index (PPI), a measure of inflation at the wholesale level, went up 6.8 percent in April, the same as in the previous month.

China now faces mounting inflation pressures after a severe drought swept through many provinces in May, disrupting agricultural production, said Sheng Laiyun, spokesman of the NBS .

But the impact of the disaster is under control since the country has hefty grain reserves thanks to seven consecutive years of bumper harvests, he said.

Inflation is elevated and will even rise to slightly above 6 percent in June, though the risk for inflation to get out of control is small, said Lu Ting, an economist with the Bank of America Merrill Lynch.

Steadily rising non-food prices, including rising labor costs, suggest inflation could be sticky and structurally elevated at about 4 percent in the next several years, Lu said.

The government has spared no efforts to relieve inflation jitters. On June 14, the People's Bank of China, the central bank, announced to raise the reserve requirement ratio by an additional 0.5 percentage points. It was the sixth such hike this year after six increases in 2010.

Increases in international commodities prices have shown signs of tapering off, which will help tame inflation in China, said Peng Wensheng, chief economist with the Beijing-based China International Capital Corp. Ltd.

But the government is less likely to roll back some of the tightening measures, he said.

Foreign trade

In May, foreign trade totaled $301.27 billion, up 23.5 percent from a year ago, said the General Administration of Customs. Of this total, imports totaled $144.11 billion, up 28.4 percent, while exports edged up 19.4 percent year on year to $157.16 billion.

Imports of iron ore jumped 8.1 percent from a year ago to hit 280 million metric tons for the first five months of this year, while imports of crude oil increased 11.3 percent to 106.51 million metric tons.

The overall strength in imports suggests that China's domestic demand has not slowed as much as the market may have feared, said Wang Tao, an economist with UBS in Hong Kong.

Qu Hongbin, chief China economist at HSBC, attributed the slower exports to a recent downshift of the global manufacturing cycle and the disruptions caused by Japan's earthquake and tsunami.

"But a sharp free-fall in exports is less likely this year, since the global economy is still on track of recovery, though at a slower pace than anticipated," he said.

"China's economic growth is just moderating towards a soft landing. Imports will remain robust and likely continue to keep faster pace than exports growth," Qu said.

The trade surplus in May stood at $13.05 billion. The figure brought the trade surplus in the first five months to $22.97 billion, down 35.1 percent from the previous year.

Industrial added value

The added value of industrial enterprises above a designated sized—annual sales revenue of 20 million yuan ($3 million)—rose 13.3 percent year on year in May, down from April's 13.4-percent growth.

All 39 sectors reported growth in industrial added value in May. The best performers were telecommunications equipment and non-metal minerals, which grew 18.9 percent and 18.5 percent, respectively.

Fixed-asset investments

China's investments in fixed assets totaled 9.03 trillion yuan ($1.39 trillion) in the first five months of 2011, rising 25.8 percent from a year ago. The growth rate was 0.4 percentage points higher than that during the first four months.

Investment in the property sector increased 34.6 percent year on year to reach 1.87 trillion yuan ($287.7 billion).

China's economic growth remains on a steady track given vibrant investments, which will continue to be a growth engine of the economy, said Wang Tao, chief China economist at the UBS.

Retail sales

In May, retail sales of consumer goods edged up 16.9 percent to 1.47 trillion yuan ($226.77 billion). The figure brought the amount for the first five months to 7.13 trillion yuan ($1.1 trillion), up 16.6 percent from the previous year.

Money supply

The broad money supply (M2), which covers cash in circulation and all deposits, increased 15.1 percent from a year ago to 76.34 trillion yuan ($11.7 trillion) at the end of May, said the central bank.

Bank lending

New loans denominated in the yuan totaled 551.6 billion yuan ($84.9 billion) in May, compared with 739.6 billion yuan ($113.8 billion) in April, said the central bank.

The May figure brought the amount in the first five months to nearly 3.55 trillion yuan ($546.2 billion), a decrease of 12 percent from the same period last year.

Policymakers have been pulling on a variety of levers to rein in bank lending amid fears over inflation and frothy house prices.

"The May monetary data suggest the prudent monetary policy is bearing fruit," said Zhuang Jian, a senior economist with the Asian Development Bank.

But it is necessary to increase policy flexibility to strike a balance between maintaining growth and combating inflation, he said.

Fiscal revenue

Fiscal revenues of the country jumped 32 percent year on year to reach 4.68 trillion yuan ($720 billion) in the first five months of 2011, said the Ministry of Finance.

In May alone, fiscal revenue grew 34 percent from the previous year to 1.06 trillion yuan ($163.1 billion).

Auto Gloom

China's auto market continues to lose momentum. Auto sales across the country totaled 1.38 million units in May, down 3.98 percent from a year ago, the second consecutive month of decrease, said the China Association of Automobile Manufacturers (CAAM).

The May output came in at 1.35 million units, falling 4.89 percent from a year ago.

Dong Yang, Secretary General of the CAAM, attributed the gloom to the end of policy incentives, new limits on car purchases in Beijing and climbing fuel prices.

In attempts to counter traffic gridlock, Beijing has launched a car-quota system, allowing only 240,000 new cars to be registered in 2011, compared with the 800,000 new automobiles that took to the streets in 2010.

The CAAM in earlier expected the market to grow 15 percent after surging 46 percent and 32.4 percent, respectively in 2009 and 2010.

"It will probably fall short of the forecast if no positive factors emerge," said Dong.

As a pillar of the national economy, the auto industry accounts for 2.5 percent of the GDP, 10 percent of retail sales and 12 percent of job creations, he said.

"The decline is anticipated," said Zhang Xin, an analyst at the Beijing-based Guotai Jun'an Securities Co. Ltd. "After several years of rapid growth, a modest slowdown is healthy for the industry."

Zhang noted that many car buyers had rushed to take advantage of last year's incentives, soaking up much potential demand.

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