China's economic growth continues unabated

Industrial production surprises on the upside and analysts expect monetary policy to remain loose.

The recent slew of data to come out of China has shown that economic growth not only remains strong, but is also becoming broader. And while analysts believe that the annual growth targets will be met at the end of the year, they also argue that stimulus package support will remain in place for the foreseeable future.

The data that caused the most surprise were the consensus-beating industrial production, which was up 16.1% year-on-year in October, somewhat higher than the 13.9% increase in September. This goes hand-in-hand with the latest purchasing managers' index (PMI) score, which was 55.2, well above the 50 level which shows that the manufacturing sector is growing. But the growth is due more to the continued strength in domestic demand than to demand from overseas; the section of the PMI score that accounts for new orders was at 58.5, while new export orders was somewhat lower at 54.5.

"We believe the recovery of exports is on the way, given the huge rebound of Taiwan export orders -- our favoured leading indicator for China exports -- and the successive expansion in the new export order index in manufacturing PMI," said Hongbin Qu, HSBC's chief China economist, in a research note.

Growth in fixed asset investment also remains strong, at 33.1% year-on-year in the first 10 months of 2009, though the make-up of the growth is starting to change.

"Although policy-driven investment projects, such as those in infrastructure, continue to post the strongest growth, the recovery in private sector investment, especially real estate development is helping to relieve the reliance on government initiatives to power growth," Morgan Stanley's China economist Qing Wang said in a research note.

The other main economic measure that observers have been looking at is money supply and loan growth. M2 money supply grew by 29.4% in October, pretty much in line with September's levels. Loan growth, however, was significantly lower than the month before -- the Rmb253 billion ($37 billion) lent by Chinese banks in October was less than half the Rmb516.7 billion dished out in September. The dip from September to October is line with historical trends, and the total Rmb8.9 trillion lent so far this year is still 143.6% higher than last year.

China's four biggest banks are contributing less to overall money lent. In September the state-owned 'Big Four' lent a combined Rmb110 billion, 21.4% of new loans, compared with 70% of new loans made in the first half of the year.

The main fear among investors interested in China is around the inevitable end of stimulus support, which many believe will be signalled by a reversal in the lending policy. This is already happening to some extent with government moves to slow down increases in property prices by tightening the mortgage requirements for second homes. The government has also announced that it shall improve the scrutiny of new loans to ensure that the money ends up where it was intended to go -- not in the stockmarket. But most analysts believe a strong turnaround in economic policy is unlikely in the near future.

"While the government is deploying policy directives and open market operations to manage money supply, these actions appear to be limited to sectors suffering from over-capacity or asset price inflation," commented Jing Ulrich, J.P. Morgan's chairman of China equities and commodities, in a note. "The [People's Bank of China] has reiterated that China will maintain its moderately loose monetary policy owing to remaining uncertainties with the economic recovery. This suggests that broad-based tightening is highly unlikely in the near term."

¬ Haymarket Media Limited. All rights reserved.