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- Mainland China's industrial output grew at a faster pace of 12.3% in August after rising 10.8% in July, pushing the economy one step closer to achieving the government's 8% growth target for 2009. With exports showing little signs of recovery, the Mainland's economic growth continues to be driven by domestic demand.
- Exports plummeted by 23.4% in August following a contraction of 22.8% in the previous month, but fixed asset investment in the urban areas continued to grow strongly by 33.6%. Retail business was also good, with the sales of consumer goods rising 15.4% in August after a growth of 15.0% in the first seven months.
- Deflationary pressure eased. The consumer price index dropped by a slower pace of 1.2% in August after contracting 1.8% in July mainly due to a rebound in food prices.
- Although the Mainland is in new trade dispute with the US over the latter's imposition of an emergency duty on Chinese tyres in early September, a full-blown trade war is unlikely as this is not in the best interest of both countries. Mainland China is the biggest creditor of the US, while the US is the Mainland's second largest export market after the European Union. A trade war between two of the world's biggest economies will also be detrimental to the global recovery just underway.
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Latest figures suggest that mainland China is one step closer to achieving the government's 8% growth target for 2009. Industrial output grew 12.3% in August after increasing 10.8% in July and 7.0% in the first half of the year. With external demand showing little signs of improvement, domestic demand remains the major growth driver.
Property investment accelerating
Exports fell further by 23.4% in August after contracting 22.8% in July. In the first eight months, mainland China's exports dropped 22.2%. Meanwhile, fixed asset investment in the urban areas surged by 33.6% in August after growing 29.9% in July (Exhibit 2). Investment in the property sector was especially strong, with its pace of growth soaring to 34.6% in August from 19.6% in July and 9.9% in the first half of the year. Retail business was also good, with the sales of consumer goods rising 15.4% in August after growing 15.0% in the first seven months.
Despite market concerns, the monetary authorities did not tighten credit. RMB-denominated loans increased more than expected by RMB410 billion in August, up from RMB356 billion in July. At this pace of expansion, new RMB-denominated loans would amount to RMB9,700 billion for the whole year. This would represent a growth of 32.0% for RMB-denominated loans outstanding, well above last year's 18.8%.
Deflationary pressure eased on rising food prices
More surprising was that consumer prices dropped by a smaller than expected 1.2% in August after contracting 1.8% in July due to rising food prices (Exhibit 3). In August, food prices rose 0.5%, the first increase in six months, while non-food prices dropped further by 2.0%.
Food prices peaked in February 2008 and started to drop in February this year. Food prices have probably bottomed out, but with agricultural input prices still falling at a 7.5% rate in August, it is unlikely that they will rebound noticeably any time soon. With non-food prices remaining subdued, this means that consumer prices will continue to fall for some more months.
Trade war unlikely
Of greater concern is the rising trade friction between Mainland China and its major trading partners in recent months. On 11 September, US President Barack Obama imposed a punitive duty on all imports of Chinese tyres for cars and light trucks for a period of three years, effective 26 September. The duty was imposed on the basis of the Special Safeguard Provisions (SSP) as recommended by the International Trade Commission (ITC), an independent federal agency that investigated the case. In addition to the existing duties of 4%, tariffs will rise a further 35% in the first year, 30% in the second and 25% in the third.
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