Concerns here about a Chinese “hard landing” eased in late 2011 as real money expansion revived on the back of policy actions and slowing inflation. Six-month growth in real M1, however, was still below average in December, suggesting moderate rather than strong economic prospects – see previous post.

Yesterday’s official manufacturing PMI results, showing the highest new orders reading since October, could be interpreted as supporting a more upbeat outlook. The official numbers, however, fluctuate seasonally, despite supposedly being adjusted for such variation. After applying Datastream’s seasonal adjustment algorithm, new orders slipped back in January – see chart. Based on the historical relationship, the current reading of a little over 50 is consistent with six-month industrial output expansion of about 5%, or 10-11% annualised – below a long-term average of 15-16%.

The “big picture”, therefore, is that China was in danger of a crash landing last summer but a subsequent easing of monetary conditions seems to have stabilised growth at a slightly below-trend pace. Such a scenario would be promising for markets, implying that China continues to contribute significantly to global economic expansion while domestic inflationary pressures ease at the margin, allowing further gradual policy loosening.

The ECB’s latest bank lending survey confirms a significant tightening of credit conditions but forward-looking components are marginally less grim, probably reflecting the ECB’s three-year lending operation.

The net percentage of banks tightening credit standards on business loans rose to 35% last quarter, the highest since 2009 and similar to the level in early 2008 before a collapse in industrial output – see chart. This confirms a message of weakness from last week’s monetary data – see previous post.

The balance planning to tighten standards in the current quarter, however, was lower, at 25%, reflecting an expectation of less difficult wholesale funding conditions following the ECB’s decision to extend the maturity of its liquidity support and loosen collateral requirements further. Banks, presumably, will have been encouraged by a thawing of markets since the survey was conducted in late December / early January, with the key three-month LIBOR / OIS spread subsiding from more than 90 to below 70 basis points.