A fall after March’s surprisingly strong readings - which were in turn boosted by a post-New Year seasonal effect and possibly a desire to meet first quarter GDP targets - was unsurprising. However, the magnitude of the fall was not encouraging.
In our view, a full-scale recovery would depend largely on how the front-loaded fiscal stimulus would play out from the second quarter and whether the chain reaction from property and infrastructure stimulus translates into a more sustainable improvement in industrial profit and household income. While it is still too early to tell, April data did not show many positive signs.
Real retail sales growth made a new low at 5.1 per cent year-on-year. Industrial production growth slowed back to near its lows, at 5.4 per cent year-on-year. Manufacturing investment also saw the lowest year to date growth of 2.5 per cent since 2004, and April monthly figures dipped negative on the year-on-year front. This could improve as calendar/VAT effects die down, but the general trend could remain weak, as corporates take time to further de-stock and repair their balance sheets before taking on new investments.
More worrying is the bad mix of overall investment - private company investment growth is barely above 3 per cent year-on-year in nominal terms, and so, despite a fairly stable headline number we are back to the old days of relying on a mix of real estate and state-owned enterprise investment. This does not bode well for productivity.
Source: China National Bureau of Statistics/Haver Analytics, May 2019
A wobbly second quarter was always the base case, with April particularly vulnerable after a strong March. Chinese activity will eventually be supported, although only later in the second half of 2019, by its surprisingly large stimulus. But this weak dataset, both in the headline numbers and the underlying investment detail, reminds us to stay cautious.
China has structural challenges, not least Beijing’s interventionist industrial policies and preference for state control which are denting the private sector, and its difficulty in weaning itself off credit-fuelled, lower-quality growth.
Earlier this month, the central bank announced a targeted reserve requirement ratio (RRR) cut for selected small banks to 8 per cent, releasing RMB 280 billion in liquidity. Looking ahead if the trade war worsens, China is likely to increase its policy stimulus through more infrastructure investment, further cuts to the RRR, continued credit easing and a less hawkish stance on the property sector.