China’s industrial economy recorded strong growth in November, fuelling expectations that policymakers will shift their focus to controlling debt growth and strengthening the case for the US Federal Reserve to tighten monetary policy amid a revival of inflation.
After a low start to the year, a robust property market and government infrastructure spending have boosted China’s manufacturing sector in the second half, calming global worries about a hard landing for the world’s largest economy. President Xi Jinping told top Communist party leaders last week that he was confident of meeting the economic growth target of at least 6.5 per cent for 2016.
The statistics bureau said on Tuesday that electricity production, which sceptics of China’s economic data view as a proxy for activity in the industrial economy, grew 7 per cent in volume terms in November from a year earlier as factories revved up production. That adds credibility to figures showing 6.2 per cent annual growth in industrial output in November, accelerating from 6.1 per cent in October.
Construction of housing and infrastructure has fuelled demand for commodities such as coal, steel and oil, leading to a rebound in prices. Reflecting the commodity rebound, data last week showed that Chinese producer price inflation surged to an annual pace of 3.3 per cent in November from 1.2 per cent in October, its fastest in five years. That marks a sharp reversal for producer prices, which had been in outright deflation for more than four straight years until September.
“For the Federal Reserve, a revival of Chinese inflation adds to the case for US monetary policy to normalise further, both at this week’s [Federal Open Market Committee] meeting and in 2017,” Bill Adams, senior international economist at PNC Financial Services, wrote on Tuesday. “Chinese export prices are rising, global oil prices are rising and US wages are rising.”
Yet the revival of heavy industry illustrates the extent to which policymakers have opted to defer painful reforms that would harm short-term growth but aid the economy’s long-term transition away from smokestack industries. Analysts believe Mr Xi is determined to maintain strong growth in the run-up to a leadership reshuffle at a five-yearly party congress in late 2017. A politburo statement last week buttressed that view.
Still, the strong data open up at least some space for China’s central bank to shift towards addressing the risk from rising debt. The People’s Bank of China has already tightened liquidity in recent weeks, leading to an uptick in money-market rates and falling bond prices.
There are also signs that recent strong growth may not be sustainable. Property investment growth slowed last month, showing the effect of market cooling measures introduced in recent weeks to address overheating in large cities. Slower construction growth will eventually feed through to commodity demand. The president of China Vanke, the country’s largest residential developer, told Communist party mouthpiece the People’s Daily this week that he expected property sales to fall next year.
“We do not expect policymakers to significantly slow the pace of credit expansion before the 19th party congress of H2 2017,” Louis Kuijs, head of Asia economics at Oxford Economics, wrote in a note. “But the decent overall economic growth achieved recently makes it a bit easier to consider some adjustment of the stance.”
Twitter: @gabewildau
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