China Data on Tap

A flurry of Chinese data will be reported in the next 12-24 hours. The general picture that will be depicted by the data is of an economy that continues to recover from the global financial and economic shock of last year. There are three elements that will command the market's attention: inflation data, exports and new yuan loans.

China is still experiencing deflation as both consumer and producer price inflation were still well below zero in September (-0.8% and -7.0% respectively). Deflationary forces are easing. The pace of decline of consumer prices is expected to halved and a positive reading is likely before year end. The combination of a weak yuan, which has depreciated in tandem with the dollar, sharp prices in money supply (M2 29.3% year-over-year)and some increases in administered prices seem to be responsible. New money supply figures will also be released this week.

China's trade surplus has been recovering since bottoming in June at $8.34 bln. The October surplus is expected to be almost $19 bln, which would be the highest since January. Exports look to have continued their recovery as the pace of decline subsides. The 13% decline expected year-over-year in Oct would be the smallest decline of the year. Chinese exports peaked in July 2008 at about $136.7 bln and bottomed in Feb near $65 bln. In Sept they stood at $116. Partly due to the base effect, Chinese export growth will likely turn positive on a year-over-year basis as early as November. We note that exports for the region are likely to be particular robust in the coming months.

New Chinese loans are being monitored by investors after the surge in the first half. The pace of new yuan loans is expected to have slowed to CNY370 bln from CNY516.7 bln in Sept. The five year average is near CNY385. This seems to be consistent with what Chinese officials call appropriately easy monetary policy. In recent months Chinese officials, through moral suasion, are believed to have encouraged banks to reduce but in no way cease new lending, and specific industries were targeted which are believed to be experiencing excess investment of speculation.

China will release other data, including fixed investment, industrial output and retail sales. The reports are expected to be consistent with a further acceleration of Chinese growth. If the data is reported in line with expectations, it may support regional equity markets and currencies.

The combination of expectations for Chinese data and the broad based dollar decline has seen the 12-month non-deliverable forward yuan contracts price in about a 3.3% appreciation over the next 12 months. This has been slowly creeping up in recent weeks as the market begin anticipating a de-pegging of the yuan next year, although Chinese officials continue to stress the importance of currency stability.

At the end of last week, the PBOC governor played down the international pressure for yuan appreciation. And the G20 and IMF did not appear to escalate the pressure over the weekend.