Economic Update: Weak data, mild stimulus, maybe bigger stimulus on the way

The Main Point

Economic statistics continued to disappoint. Concern that growth will be even lower than expectations is growing. Interest rates were lowered again. China may be preparing for larger fiscal stimulus, which could damage the national balance sheet.

 

Key Events

Economic indicators pointing down

As the examples below reflect, most economic indicators continue to suggest that China’s economy is still decelerating. Meeting the government’s target of 7% looks more difficult.

 

Policy Adjustment: Another Rate Cut

Lending and deposit rate cut: Benchmark, one-year lending rate cut by 25 basis points to 5.1 percent; benchmark deposit rate cut by the same amount to 2.25 percent

5th stimulatory action in 6 months: China has now lowered interest rates and relaxed the reserve requirement ratio (RRR) five times in six months

 

The foundation for more stimulus: Local Government Borrowing

China massive build-up of debt had to a large degree been attributed to local government borrowing. China has announced new restrictions designed to limit the local government borrowing. In May China loosened one of the restrictions by announcing that the special financial vehicles that local government use could once again borrow funds. The government also announced measures to accelerate a program by which banks that buy bonds from local governments can swap those bonds for funds from the central bank, which will make them more willing to lend to local governments.

 

Economic Indicators

Industry

Flash PMI for May: Preliminary Purchasing Managers’ Index fell to 49.1 (below 50 indicates contraction.) April was 48.9. After a brief rebound in February, the index has now signaled contraction for three consecutive months. The employment sub-index showed manufacturers shed jobs for the 19th month in a row.

Fixed-asset investment: Rose 12% in January-April from a year earlier, the slowest pace since December 2000. In March FAI grew just 9.6%, versus 13.1% in March.

Industrial production: Increased 5.9% in April, a step up from March’s 5.6%, but otherwise the slowest pace since the end of 2008.

 

Real Estate

Construction starts: Down 17% for the January-April period compared with a year earlier.

Housing sales: Rose 16% in April from a year earlier, after dropping 13 of the past 14 months.

Property investment: Grew 6 percent from January to April as compared to a year earlier, the weakest level since 2009.

Inventory of unsold housing: Expanded 24% from the year earlier.

 

Consumers

Retail sales: Grew 10% in April from a year earlier, slowing from a 10.2% increase in March,

Car sales: Grew just 3.7% in April, the slowest in more than two years.

 

Trade

Imports: Fell by a bigger-than-expected 16.2% over a year earlier; March had a 12% decline.

Exports: Fell 6.4%; March has a 15% decline.

Total imports and exports: For Jan-April contracted by 7.6 per cent compared with a year earlier,

Monetary Indicators

Loan Growth: Down 40% in April as compared to March (707.9 billion vs. 1.18 trillion yuan)

Money Supply: M2 was up 10.1% at the end of April compared with a year earlier, the slowest pace on record

Total outstanding financing: Grew just 12.4%, the slowest expansion on record

 

 

Sources for this Story:  

China’s factory index shrinks for third month, signalling need for more stimulus

http://www.scmp.com/news/china/economy/article/1805322/chinas-factory-index-shrinks-third-month-signalling-need-more

 

China Backtracks on Local Government Debt

http://www.wsj.com/articles/china-urges-banks-to-continue-lending-to-local-financing-vehicles-1431682151

 

China Numbers Come Up Weak

http://www.wsj.com/articles/china-numbers-come-up-weak-1431502256

 

China Beefs Up Plan to Tackle Local-Government Debt

http://www.wsj.com/articles/chinas-jiangsu-province-to-relaunch-bond-sale-on-may-18-1431486373

 

China Housing Market Posts First Growth of Year

http://www.wsj.com/articles/china-housing-market-shows-signs-of-life-1431509457

 

China Launches Stimulus Aimed at Local Debt Crisis

http://www.wsj.com/articles/china-stimulus-aims-at-restructuring-trillions-in-local-government-debt-1431511027

 

China economy loses more steam in April, further stimulus on the cards

http://www.reuters.com/article/2015/05/13/us-china-economy-idUSKBN0NY0OE20150513

 

China’s imports, exports fall amid further signs of weakness in slowing economy

http://www.scmp.com/news/china/economy/article/1789134/chinas-exports-fell-64pc-april-compared-last-year-far-below

 

China’s Very High Mountain of Debt

http://www.bloomberg.com/news/articles/2015-05-08/china-s-very-high-mountain-of-debt

 

China’s services sector grows at fastest pace this year, survey suggests

http://www.scmp.com/news/china/economy/article/1787442/chinas-services-sector-grows-fastest-pace-year-survey-suggests

 

China cuts interest rates for third time in six months as economy sputters

http://www.reuters.com/article/2015/05/10/us-china-economy-rates-idUSKBN0NV0A320150510