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The Chinese economic recovery continues, but investors should take Friday's trade data with a huge grain of salt: Seasonal adjustments suggests there's a lot less there than initially meets the eye.
The People's Bank of China reported year-ove- year import growth of 28.8 per cent for January, well ahead of consensus economist expectations of 23.5 per cent. Usually import numbers this strong would form a huge buy signal for Canadian investors in mining sectors as an indication that the infrastructure boom was reaccelerating.
However, the 2013 report is highly skewed by the timing of the Lunar New Year celebrations, when the majority of China's factories shut down for a week or more. In 2012, the holiday fell in January, but this year it occurs entirely in February. January import growth falls to 3.4 per cent when adjusted for the holiday, a far less robust indication of demand.
Money supply growth results were also reported and were deceiving for entirely different reasons. The M2 money supply measure, which totals currency, savings deposits, time deposits and money market funds, was reported 3.8 per cent higher than expectations at 15.3 per cent. Chinese M2 growth has been arguably the best leading indicator for Canadian resource stocks in the past decade (see chart) and this will likely remain the case. However, the explosion of shadow bank lending in China is not captured by M2. This suggests that official money supply measures are understating the amount of economic activity as well as the demand for commodities.
Chinese economic data has become a virtual Rorschach test for economists with all kinds of distortions generated by its state-run, opaque orientation. There remains a faction of economists like the highly-useful-yet-unfortunately-anonymous Also Sprach Analyst, who believe all Chinese data are works of fiction. Nonetheless, despite the muddle, the most reliable indications of the Chinese economy continue to point to a recovery.
Scott Barlow is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights and follow Scott on Twitter at @SBarlow_ROB.
Scott Barlow