Monday, May 14, 2012

Has China got further to slow?

Last week saw the release of a plethora of Chinese economic activity data, all of which came in weaker than expected.  Money supply and loan growth data dipped down again in April after having put in reasonably strong growth in March.  Industrial production also came in weaker than expected at 9.3% for the year to April.  Retail sales growth also dipped lower over the month.

The only bright spot in the news was a move lower in inflation from 3.6% in March to 3.4% in April.  That’s comfortably below the official target of 4%.

A weak start to second quarter activity indicators raises the prospect that GDP growth slows further into the second quarter of the year.  You will recall March GDP came in at 8.1% for the year which was below market expectations, but higher than our expectations of a result under 8%.  A sub-8% GDP result is now on the cards again, but now for the year to June.

The good news is there is plenty of scope to ease policy settings in China. Indeed following this latest data release authorities moved quickly to lower the reserve ratio requirement by a further 50bps which will help boost lending. 

The authorities are understandably reluctant to give up the hard won gains on inflation.  For that reason we believe further easing will continue to focus on cuts to the reserve ratio with interest rate reductions coming through later in the year if inflation continues to drift lower.  There is also room for fiscal policy to do more work if required.

Disappointment in the China data last week was offset somewhat by better news out of the other half of the G2.  Data out of America last week showed increases in consumer sentiment, consumer credit, weekly mortgage applications and a small fall in weekly jobless claims.