Wednesday, May 14, 2014

China data shows beginnings of stabilisation

The most you can say about China’s April activity data is it is showing the beginnings of stabilisation.  Growth in fixed asset investment, industrial production and retail sales were all weaker than market expectations while external sector data came in stronger.  That said the data was broadly in line with our view for this year of continued weakness in investment, stability in retail sales and a recovery in exports.  Continued benign inflation gives ample room for the Government to continue their “fine tuning” approach to stimulus.

Investment continues to be the most significant drag on China economic growth.  Year-to-date growth in fixed asset investment activity declined to 17.3% in April from 17.6% in March.  This is now the lowest level since 2002.  The slowdown reflects over-capacity, which will continue to take some time to unwind, and relatively tight credit conditions.

Nominal retail sales growth slowed from 12.2% yoy in March to 11.9% in April.  However, real growth showed a slight improvement rising from 10.8% to 10.9% over the month.  Industrial production slowed a tad further from 8.8% in March to 8.7% in April. 

Imports and exports both came in stronger than expected with exports up 0.9% yoy. Export growth continues to suffer from the base effect of over-reporting last year.  Growth is probably running closer to 6-7%.  Import growth is being held back by weak domestic demand, which we expect will remain relatively flat in the period ahead.  However, given the high imported component of China’s exports, recovery in export growth later this year as the US recovers from poor weather and as activity in the Euro zone continues to expand will also see import growth move higher as the year progresses. 

Money supply (M2) growth recovered to 13.2% yoy in April, up from the low of 12.1% recorded in March.  The official target for M2 growth this year is 13.5%.  CPI inflation is now running at 1.9% yoy, well short of the 3.5% target for this year and the lowest inflation reading since late 2012.  The latest decline was driven by falls in food prices with core inflation remaining around the recent trend level of 1.6% yoy. 
The Government has taken a fine tuning approach to stimulus which has been mostly focussed on infrastructure spending.  There was also a cut to the required reserve ratio recently but only for rural banks.  While we think GDP growth will slow further into the second quarter, we expect the authorities will continue the current approach of providing only modest cyclical support.