Tuesday, May 14, 2013

Better China data but areas of weakness remain

After being disappointed with March quarter GDP growth in China we have been anxiously waiting for April data for a read on the start to the second quarter of the year.  On balance the data makes me more comfortable with the story of a modest cyclical upturn, but there are still areas of weakness.

The release of April activity data began last week with trade and money and credit aggregates.  Credit increased Rmb 793 billion over the month with total social financing rising by Rmb 1.75 trillion.  The data shows continued healthy demand for credit with non-bank lending particularly strong.  M2 money supply is running strongly at an annual pace of 16.1% over the year, well ahead of the target growth of 13% for the year and supporting the story of an improvement in the nominal economy.

April exports and imports both exceeded expectations over the month, rising 14.7% and 16.8% respectively.  Some China-watchers are questioning the validity of the export data given other export indicators such as port put-through and PMI export orders suggest somewhat weaker growth.  Import data suggests some strength in domestic demand.  Implied commodity volume growth supports further growth in infrastructure investment.

Annual growth in industrial production rose from 8.9% in March to 9.3% in April, although the monthly change was negative.  The annual rate rose by virtue of a larger monthly negative number dropping out of the annual calculation from last year.  Nominal retail sales growth nudged higher from 12.6% in March to 12.8% in April.

The disappointment came in the growth in Fixed Asset Investment which fell to 20.1% in April, down from 20.7% in March.  The weakness was largely due to a decline in the annual rate of infrastructure investment, although the import story above supports some degree of pick-up is likely in the period ahead.

I’m still hanging onto my 8.2% GDP forecast for the year.  While the activity data is undeniably soft in some areas, the credit data in particular gives me confidence there is still some upward momentum in the economy.    However, we may now have to wait until later in the year for the improvement to show through in the GDP numbers.  A stronger US economy later this year will also assist export growth.

I don't think there is enough in this data to spur a policy response from the authorities.  Although non-food inflation printed at a benign 1.6% in April, we continue to expect inflation to trend up to around 3% this year.  That’s significant in light of the lower 3.5% inflation target for this year.  That, along with clear attempts already by the authorities to contain the recovery in the housing market seems to preclude interest rate reductions.  But neither do we expect a tightening in monetary conditions until next year.