February Inflation Close To Government Target

The data for January and February released during the weekend was on balance weaker than expected and suggests recovery so far has gained little momentum in 2013. Industrial production disappointed and so far suggests GDP growth in the current quarter will not improve markedly from 7.9% y/y in Q4. This also suggests that GDP growth continues to be slightly below potential growth.

The domestic demand picture was mixed. Investment demand was stronger than expected consistent with the relatively strong credit growth registered in January and February. On the property market, new homes sales continue to improve and housing starts are also recovering moderately. However, retail sales slowed markedly, as the government's frugality campaign to reduce wasteful spending appears to have had a substantial impact on retail sales during the Chinese Lunar New Year season

Inflation in February jumped sharply to 3.2% y/y from 2.0% y/y in January and hence came close to the 3.5% inflation target the government has just announced for 2013. However, the jump in inflation was solely due to the impact from the Chinese New Year holiday and we expect inflation to drop back to around 2.5% y/y in March. Hence, the jump in inflation is unlikely to be a major concern for the Chinese government.

The data for January and February suggest downside risk to our 8.3% y/y GDP forecast for Q1 13 and our 8.6 % GDP growth forecast for 2013 as a whole. However, leading indicators like monetary supply and credit growth continue to be strong, indicating that China remains in a moderate acceleration phase. However, the weaker-than-expected data suggest that it is too early for the People's Bank of China to move towards a tightening bias despite the jump in inflation in February.

To Read the Entire Report Please Click on the pdf File Below.