The Statistical Bureau, PBOC and Customs released a set of November economic data. Three points are noteworthy:

1) FAI growth surprised on the downside. FAI ytd came in at 32.1%yoy, slowing from 33.1% in Jan-Oct and 1ppt below consensus. On a single month basis, urban FAI growth slowed sharply to 24% yoy in Nov from 31% yoy in Oct and the recent peak of 39% in May. The more interesting leading indicator is the RMB amount of newly started FAI projects: its yoy growth decelerated to 41% yoy in Nov from about 80% yoy in previous months and over 100% in Q2 this year. It shows that the government has begun its control on the pace of new project starts, after seeing the macro risks (inflation, bad loans, etc) from the surge in FAI starts in the first half of this year.

2) CPI inflation rose rapidly to 0.6% yoy in Nov, up 1.1ppt from -0.5% in Oct., stronger than consensus of 0.4% but in line with our forecast. This is a milestone for China's on-going inflation cycle: the yoy figure now turns positive after 9 months of deflation. And the pace of the recovery has been fast due to mom price increase as well as an increasingly less favorable base effect. For November alone, the CPI was up 0.3% mom, with the strongest increases seen in textiles/apparels (up 0.9% mom) and housing (up 0.8% mom). These reflect two important features of the Chinese economy today: export recovery (benefiting the pricing power of textile makers) and property price inflation. We maintain our forecast that CPI inflation will reach 3.4% next year and will likely hit its monthly peak at around 4% in Q3 next year.

3) M1 growth continues to exceed M2 growth, indicating rising inflation expectations and a potential increase in the velocity of money. Yoy M1 growth accelerated to 34.6% yoy in Nov, up another 2.6ppts from Oct. M2 growth rose a bit to 29.7% yoy in Nov. The differential between M1 growth and M2 growth has reached 5ppts. This means that more households are moving their money from term deposits to demand deposits or cash. Part of this shift reflects the rise in inflation expectations and suggests that more people are getting ready to spend. Historically, 2-3 quarters after the M1-M2 growth differential turns positive, the velocity of money tends to rise and thus can drive inflation even without a further increase in money supply.

Other data points released today include: (1) IP growth accelerated to 19.2% yoy in Nov (vs 16.1% in Oct), stronger than consensus but largely reflecting the base effect especially for export production. (2) Retail sales slowed a bit to 15.8% in Nov (vs 16.2% in Oct) and is below consensus. It mainly reflects the slowdown in electronics sales (to 25% yoy in Nov from 35% in Oct). (3) New lending in Nov was RMB295bn, slightly higher than Oct's RMB250bn. Not a huge surprise. (4) The yoy decline in exports narrowed to 1.2% in Nov, improving 12.6ppts from the 13.8% yoy decline in October, but weaker than the market expectation of a 1.4% rise. We are not worried about this mild dissapointment, as further export demand recovery from G3 (especially the US) is quite evident. We expect China's export growth to recover further to over 15% yoy in Q2 next year. (5) Imports surged 27% yoy in Nov, up from -6% in Oct, largely reflecting the base effect (last year's Nov growth was 33ppts below that in Oct).

Market implications: Today's data releases reinforce our view that inflation will be an increasingly important theme for the market next year. The three key beneficiaries of inflation are insurance, consumer, and soft commodities. The victims include IPPs and oil refining. On the other hand, the slowdown in new FAI project starts suggests that infrastructure construction will unlikely to provide positive surprises next year. Housing construction, however, can be a support for raw materials for a while as the government will need to speed up economic housing construction as a way to limit property inflation.

• [Editor:editor]