Week in economics: China dominates headlines

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China dominated the headlines at the end of the week with its long-awaited but modest revaluation of the yuan. But there was plenty to keep China-watchers occupied earlier in the week too.

While most countries tend to stagger their economic releases through the month, China tends to release them in bulk. On Tuesday the market was treated to GDP, inflation, industrial production and retail sales from China.

The slew of figures showed the economy powering forward but doing so without inflation.

China continued its impressive run of strong GDP growth, with an expansion of 9.5 per cent year-on-year in the second quarter - up from 9.4 per cent in the first.

Tony Hughes, an Asian expert at Economy.com, the consultancy, said that the breakneck pace of growth was worrying. “If overinvestment leads to a bubble which pops, boom could lead to bust and the fallout could be felt far and wide,” he said. “Such a scenario, which has been a risk for about two years, is still possible, though very hard to predict especially given the paucity of Chinese data.”

Even so, headline inflation rose by just 1.6 per cent on the year in year after rising by 1.8 per cent in each of the previous months.

Economists expect that in spite of the ferocious pace of growth monetary policy is likely to be kept on hold in the second half of the year. On Tuesday the People's Bank of China said it woudl continue to “implement a stable and healthy monetary policy and maintain the steady growth of credit.”

One interesting, and worring features of this week's data from China was a sharp fall in import growth. While export growth has averaged 31 per cent year on year over the past five months, import growth has slowed to 10.6 per cent over the same period. Throughout most of 2004 imports were rising faster than exports.

Economists expect very little impact from the revaluation of the yuan announced on Thursday, which takes the currency only 2.1 per cent higher against the dollar.

“This will do almost nothing to affect China's ability to continue supplying the US with ever cheaper goods,” said Paul Ashworth, US economist at Capital Economics, the consultancy. “Chinese productivity is rising fast enough to enable them to take a much larger appreciation than this in their stride.”

Industrial production in June climbed by 16.8 per cent from a year earlier, a slight acceleration on the previous month.

Analyst saw this as a worrying sign that the Chinese government was not succeeding in cooling investment in overheated sectors.

Elswhere, there were few significant economic releases. There were further signs that residential construction in the US remains strong. In June, new housing starts held steady at a 2m annualised. This is slightly down from the first quarter of the year but still extremely strong by historic standards.

The US labour market also continued to improve with first time unemployment claims declining by 34,000 to 303,000 in the week to July 16. The four-week moving average fell to 318,000 - its lowest level since early March.

There was also good news for the British economy. Retail sales in June beat expectations rising a seasonally adjusted 1.3 per cent, with annual growth of 1.6 per cent.

Warm weather may have boosted spending, but demand for big-ticket items remains weak. The key question for economists is whether this is a temporary revival or a sign that the British consumer is stronger than previously thought.

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