Chinese economic activity numbers for January-February were disappointing but may have been depressed by New Year timing effects. Money / credit trends continue to give a positive signal for prospects.

Annual growth in industrial output fell from 5.9% in December to 5.4% in January-February. The decline may reflect an unfavourable base effect due to Chinese New Year falling unusually late in 2015 – 19 February versus 8 February this year. Late New Year dates seem to boost February production at the expense of March, probably because factories take time to return to normal operation after the holiday. So production may have been higher than trend in February 2015 but below it in March. This would depress annual growth in January-February 2016 but suggests a rebound in March.

This, indeed, was the pattern after the New Year was last similarly late, in 2007 (18 February). Annual production growth in January-February 2008 was 2.0 percentage points (pp) below the December level but rebounded by 2.4 pp in March.

There were several brighter spots in the January-February data releases. Annual growth of total fixed investment value recovered from 8.2% in December to 10.2%, driven by a 41% rise in new projects. The pick-up, however, was state-led, with private investment growth slipping further to 6.9%.

Housing market activity, meanwhile, strengthened, with floorspace sold up by 30% from January-February 2015, suggesting a further recovery in house prices. The start of the year, however, is a relatively quiet period for transactions – January-February accounted for only 9% of full-year sales in 2015.

While economic news was, on balance, disappointing, money / credit trends continue to suggest brighter prospects. Monthly changes in the key aggregates weakened in February after a super-strong January, but six-month growth of real (i.e. inflation-adjusted) narrow money* has risen markedly since mid-2015, with a smaller but still significant increase in real total social financing expansion** – see chart. Allowing for a typical nine-month lead from monetary changes to the economy, activity news should improve soon.

*The preferred narrow money measure here is “true M1”, comprising currency in circulation and demand / temporary deposits of corporations and households. The official M1 measure omits household deposits. True M1 is not yet available for February.
**Total social financing (TSF) = domestic fund-raising by households and non-bank corporations. TSF does not take account of repayments of external corporate debt but also omits recent heavy bond issuance by local governments, the proceeds of which have been used in part to repay bank debt of related corporate financing vehicles. The net effect of these influences has probably been to depress recorded TSF growth.