China activity data in May was biased to the disappointing end of the spectrum. Trade data was the most disappointing although we think the softer-than-expected export data reflects the high level of mis-reporting earlier in the year rather than a sharp decline in activity.
It was this mis-reporting that led to a move higher in our China activity index earlier this year which has now reversed. But just as we thought export growth data was unrealistically high earlier this year, the 1.0% growth recorded in the year to May probably understates the true picture. Watch this space.
As well as exports, annual growth rates of imports, nominal fixed asset investment and industrial production all slowed over the month. Only retail sales blipped higher. That has us thinking that June year GDP growth will come in at around 7.6/7.7% after recording growth of 7.7% in the year to March.
Loans and Total Social Financing also come in below expectations over the month. But while annual money supply (M2) growth came in lower over the month, at 15.8% it remains well in excess of the official target for this year of 13%.
Inflation also came in lower than expected. The CPI printed at 2.1% in the year to May, down from 2.4% in the year to April. PPI data also came in lower than expected. It's important to note however that the downside CPI surprise was in vegetable prices, which could prove to be temporary. However, the lower May reading means inflation is unlikely to meet my 3% expectation for the calendar year.
While activity data disappointed in May and inflation undershot expectations we think it’s premature to expect any aggressive stimulus action from the authorities. Growth is by-no-means collapsing. And remember the authorities have already taken action to prevent another bubble forming in the residential property market.
We think interest rate cuts are only likely if it looks like GDP growth is going to undershoot the official target for 2013 of 7.5%. That is not our base case at this point, although I acknowledge it as a risk. At the very least monetary policy is going to be able to remain accommodative for longer than we previously expected.
Prior to this recent run of softer data it was my expectation that higher credit growth would contribute to stronger gains in real GDP growth this year, as it has in prior periods. We still think growth moves modestly higher this year, but this view is now dependent on a “real” pick-up in exports (that is also reflected in higher industrial production) as growth moves higher in America and stabilises in Europe later this year.