5th March 2012
Today has opened with news from the Far East and in particular from China where the 11th National People's Congress has opened. The mainstream media seems to have fixated itself on the speech by Prime Minister Wen Jiabao who set an economic growth target of 7.5% in China in 2012 as well as consumer price inflation target of 4%. However anybody who follows China's economy will have already been aware that a reduction in growth was on the cards. Indeed back on the 12th of December I suggested that she should ease monetary policy in response to this.
"So if we look at the world right now we see that there is a danger of an economic slowdown in 2012 and that inflationary pressure has abated somewhat. This gives an opportunity for a policy response in India and further responses in China (she cut bank reserve requirement on November 30th). They should take it."
I still believe this to be the position although I did also give a warning which has also turned out to be a factor.
"The danger on the inflation side would be further trouble in the Middle East as it is plain there are many problems in Syria and the recent explosions at military bases in Iran are worrying. So the risk is further rises in the oil price."
Regular readers will recall that when the Chairman of the Federal Reserve Ben Bernanke gave the opinion that he was "100% sure" that he could deal with any inflation resulting from his expansionary policies I question this. Furthermore I question whether we can ever be 100% sure of anything! In my opinion China is in a sub-section of this where policymakers should be making a high percentage play realising that there are risks. the main issue is what her Prime Minister described thus.
"China's economy is encountering new problems"
The danger to this is oil based inflationary pressure. However the Chinese position is different to that of the UK in that policy has been designed to be contractionary with the increases in interest-rates and bank reserve requirements that took place and it is time to unwind some of those in my opinion and probably past time. Such moves take 18-24 months to fully impact so one has to look a long way ahead.
What is the latest data on China's economy?
The HSBC Purchasing Managers Index
Here we see a recovery after the impact of the Chinese New Year in January.
"February data signalled renewed growth of business activity across the combined manufacturing and service sector, with the HSBC Composite Output Index up from 49.7 to 51.8."
So we have a return to growth which is good (on this index a number >50 indicates expansion). However if we look back at the trend for this series we see the following pattern. There was an extraordinary surge in 2009 after the 2008 dip and the number pushed close to 60 but since then there has been a clear downward trend if we allow for some individual ebbs and flows. Also the recovery from the New Year celebratory period is weaker than usual this year. The position is best summed up by this from the report I think.
"The latest service sector findings signalled that new business wins did little to alter the trend in outstanding business levels, which remained broadly stable over the month. A similar tendency was seen in manufacturing and, as a result, at the composite level."
There are plainly dangers here should the oil price remain at current elevated levels (just below US $124 for a barrel of Brent crude oil). But as we stand we see this.
"Despite higher average costs, service sector companies left their output charges broadly unchanged compared to one month earlier."
One interesting change, China's stock market
One definite change in 2012 has been the performance of China's stock market. If we look at the Shanghai Composite Index we saw falls of just over 14% in 2010 and just under 13% in 2011. This year so far we have seen a rise of just under 11%. On its own this looks like a reversal of trend, however followers of the concept of #carboncopy2012 may already be mulling that we saw this at the opening of 2011 too.
Whilst looking at the Far East there is the issue of new data for Japan which has emerged overnight. We saw a purchasing managers report for her too and here is the result.
"Consequently, the Composite Output Index posted 51.2 in February, broadly unchanged on January's reading of 51.1, to again signal a modest rise in private sector activity."
So growth but slow growth for Japan. Here we see two opposite issues. This index plunged to 35 after the Tsunami that hit Japan just under a year ago and whilst there has been a recovery it has been weak and uninspiring.
On the other side of the coin and potentially hopeful for Japan we have seen a burst of Yen weakness in recent days which has seen it fall to above 81 versus the US dollar and to over 107 versus the Euro. It has weakened this morning because Japan's exporters have been reported as hedging their positions but there are grounds for wondering if this move will give Japan and her exporters a much needed boost.
However not every currency can fall!
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