Monday, June 16, 2014

Further signs of stabilisation in China – but keep an eye on property

May activity data continued the story evident in the April data of the beginnings of stabilisation in growth.  Exports, industrial production, infrastructure investment, lending and money supply growth are all supportive of that story.  However, property activity continues to slow and remains a real risk to the outlook.

Export growth accelerated to 7.0% in May, or about where we thought underlying growth has been recently absent the invoicing issues from last year.  Import growth slowed to -1.6% but we are not reading too much into that at this point.  Growth in industrial production moved a touch higher from 8.7% in April to 8.8% in May. 

Retail sales data was mixed with nominal sales growth ticking higher while real sales softened a touch from 10.9% yoy in April to 10.7% in May.  Year-to-date fixed asset investment inched lower from 17.3% in April to 17.2% in May.  That reflects strength in infrastructure spending offset by continued declines in growth of manufacturing and property investment.

Our China forecasts for this year incorporated expectations of rising export growth on the back of the improving growth outlook in America and Europe, declining fixed asset investment predominantly due to manufacturing overcapacity and a flat profile for retail spending. 

Two things have changed – the overall weaker than expected growth at the start of the year, which we expect will result in a further decline in growth in the year to June, and the weakness in the property market.  While we are generally happy with how the data is panning out now, the soft property market represents a clear risk to the downside.

The Government has introduced small and targeted easing measures over the last few months, the latest of which was a cut to the required reserve ratio for financial institutions with significant exposures to agricultures and SMEs.  These moves are best described as “fine tuning”.  We expect the Government will continue with that approach unless Q2 GDP looks like it might breach 7.0% (our forecast is 7.2%).  Although inflation ticked higher in May, the inflation outlook is no barrier to further easing.

We cannot be fully confident of stabilisation in the overall growth outlook until we see some stabilisation in the property market.  The Government has some options at its disposal that will help including speeding up the hukou (household registration) reforms and removing home purchase restrictions.  The key risk is a policy mistake – that is the Government doesn’t move fast enough to prevent a more entrenched and damaging downward trend.  Right here right now we give that a low (but higher than zero) probability.