Tighter monetary conditions set to come

It looks like the conditions in China are set for tighter monetary policy?  Why?

Well, this January the overall trade surplus China  is down US$25bn, to its lowest level since Jan 2006.  How has this happened? Domestic consumption in Jan grew much faster than exports.

Trade data in January illustrates a very strong recovery in both the domestic and export driven economies – in fact I would say it is in danger of overheating.

Exports were up 21% -, reaching at US$109.5bn (marginally below the record of US$109.64bn set in Jan 08). Thus one can comfortably consider the export economy out of the danger zone.

Simultaneously, imports jumped a phenomenal 85.5% year-on-year to a new record this January, reaching US$95.3bn (from the previous record of US$90.2bn also set in Jan 08).  Even if one accounts for the contribution made to domestic consumption by an earlier than usual Chinese new year, this data point is huge.

The difference gives the Chinese authorities an incentive to consider tightening their monetary policy.

Electricity consumption vs GDP growth

If one adds the economic output data for China’s 31 provinces in 1H09, they do not equal the national figures published by Beijing’s National Bureau of Statistics.  In fact the sum of the parts is 10% larger than the whole! (Einstein eat your heart out!), with 24 provinces announcing growth rates higher than the national average. This is an improvement on 2008 figures in which 30 provinces claimed greater than average growth.

Chinese macro economic figures have the following difficulties (especially when comparing to other countries’ figures):

1. Retail sales figures are measured at the wholesale level, and often incorporate government and corporate purchases.

2. Fixed investment data (the largest component of China’s GDP) are accounted for when the money is distributed, as opposed to spent.

3. Economic activity is measured in China in terms of how much is produced, as opposed to how much is consumed.

Economist suggest that there are other metrics by which one can judge economic growth, one such metric being electricity consumption.  The graph below shows that changes in electricity consumption in China are not highly correlated by with changes in overall output.  Granted there are other factors involved in both, but I would expect one to be indicative of the other.  From now on I suggest keeping my eyes on this electricity data as a good lead indicator of the Chinese economy, a good way to compare trends with other countries, and breaking it down to which sectors are most effecting the changes in consumption.