- April data prints were mixed.
- Domestic demand and monetary data warranted concern.
- SOE FAI in strategic sectors to counteract further decline in property investment.
- Weak credit growth prompted the issuance of ultra-long special sovereign bonds.
- Implication to forecast: PBOC will cut RRR as soon as July.
April data prints were mixed. While supply side data such as industrial production saw bottom-up recovery, consumption and investment data were disappointing. The data releases coincide with Beijing starting the issuance of CNY1trn ultra-long sovereign bond. We understand that a meeting also took place today (May 17) between the state council, local governments, and state banks covering the property sector, aimed at reducing housing inventory.
Retail sales growth slowed from 3.1% YoY in March to 2.3% in April. The headline figure was dragged down by a -5.6% contraction in automobile sales. Other big-ticket items such as construction materials fell amid property woes. On a brighter note, catering services and leisure-related items such as culture, sports, and entertainment saw more appreciable increases of 4.4% and 12.7% respectively.
Retail sales growth will likely regain its momentum in May. Domestic traffic and revenue during the Labor Day holiday exceeded the 2019 level by 28% and 14%, respectively. Positive wealth effect from the rebounding stock market could be another catalyst. Potential government subsidies for consumable upgrades will lift retail sales growth in the months ahead.
Improving labour market also went some way to boost consumer spending. The unemployment rate fell from 5.2% year-on-year in March to 5.0% in April and remained below the government’s target of 5.5%. New employment growth data to be released later this month is expected to show further expansion, alongside the palpable improvement in production activities.
2. Investment
The state sector continues to lead the economic recovery. SOE fixed asset investment (FAI), at 7.4% YoY YTD, outpaced the headline figure of 4.2% YoY YTD. Infrastructure and transportation segments, including railway and aircraft, outperformed. Government initiatives on equipment renewal also continues. FAI in computer, communication and electronics was up by 13.1%.
Property investment remained as the main drag. It fell by -9.8% YoY YTD, with residential floor space started decreased by -25.6%. The inventory turnover in 80 cities reached 32 months in March. Real estate developers are prioritizing the completion of unfinished homes, resulting in a relatively smaller decline in completed floor space.
Reports indicate the State Council is seeking feedback from provincial governments and state banks to stabilise the property market. Under the proposal, local SOEs would purchase the eight-year high inventories from distressed developers at steep discounts, using loans from state banks. The acquired properties would likely be converted into affordable housing. If enacted, it would mark a new phase in addressing the largest drag on economic growth while significantly boosting sentiment.
3. Production
Industrial activities gained broad-based traction. The official manufacturing PMI remained in expansion territory in April, as did the demand-side Output PMI and supply-side New Order PMI. Likewise, the Caixin PMI, which is dominated by SMEs, continued its upward trend for the seventh consecutive month.
Mirroring these, industrial production accelerated from 4.5% year-on-year in March to 6.7% in April. In particular, industrial robotics and integrated circuits registered double-digit growth, supported by government efforts to upgrade production capabilities. Meanwhile, EVs, solar batteries, and high-tech manufacturing all saw production increases of 39.2%, 11.1% and 11.3% respectively, thanks to improving external demand.
4. Trade
Exports swung back from a contraction of -7.5% YoY in March to an increase of 1.5% in April, suggesting a pick-up in global demand for Chinese products. The weakening Yuan also aided this upward trend. Echoing the strong industrial production data, outward shipments of high-tech products, integrated circuits, and automobiles leapfrogged. The latest tariffs raised on the “New Three Industries”, metals, and semiconductors are not likely to dent the uptick in exports growth momentum. These industries only accounted for 0.6% of China’s total exports and 4.2% of exports to the US.
Likewise, imports rebounded sharply from -1.9% to 8.4%. Commodity imports growth was acute. The ongoing stimulus on infrastructure investment, as well as progress in completing unfinished homes, is stirring the inward shipment of raw materials such as copper and iron ore. On a net basis, the trade surplus YTD remains favourable and was the second-highest four-month cumulative number on record.
5. Money supply
Liquidity condition remained tight. Broad money supply growth fell from peak of 12.9% YoY in Feb 23 to 7.2% in Apr 24. M1, or demand deposits, saw the second contraction of -1.4% YoY on record. The weaker willingness to hold short-term deposits suggests weak business investment confidence.
Accordingly, loan growth stayed flat at 9.6% YoY in April, falling below the 5-year average growth rate of 11%. New increases in mid- to long-term household loans, a gauge of mortgages, contracted by 2.4% YoY in the January-April period. Corporate borrowing activities also remained weak due to elevated real funding costs. The new increase in mid- to long-term corporate loans dropped by 10.0% YoY. Aggregate financing recorded the first decline of CNY 198.7 billion, primarily due to decreases in bankers' acceptance bills and government bonds. Such subdued credit growth has prompted the issuance of the CNY 1 trn ultra-long special sovereign bonds.
The 1Y MLF rate was kept unchanged at 2.50% on Wednesday. The People's Bank of China (PBOC) may cut the Reserve Requirement Ratio (RRR) as soon as July to stimulate credit growth and smoothen liquidity for the trillion-worth ultra-long sovereign bond issuance. Modest CPI and slower money supply growth also necessitate an RRR cut.
6. Inflation
The CPI increased from 0.1% YoY in March to 0.3% in April. Core CPI rose from 0.6% in March to 0.7% in April. This was mainly attributed to an increase in service prices. The decline in food prices, which has been a major drag on inflation, stabilized at -2.7% in April. The rebound in pork prices offset a further decline in fresh fruit prices.
The decline in the factory gate price slowed from -2.8% YoY in March to -2.5% in April. Upstream prices mining and raw material prices eased further, from -3.5% and -2.9% to -4.8% and -1.9%, respectively. However, downstream prices continued to face headwinds. Automobile prices continued to drop amid intense price competition and overcapacity.
7. Conclusion
Additional infrastructure investment financed by trillion-worth ultra-long special bond issuances, as well as potential state efforts to reduce housing inventory, could help bring the economy back on track. Such significant stimulus necessitates an accommodative monetary condition through further easing.
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Nathan Chow 周洪禮
Senior Economist and Strategist - China & Hong Kong 高級經濟學家及策略師 - 中國及香港
[email protected]
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