During the National People’s Congress, China’s policymakers announced that it would target 7.5% GDP growth target for 2014.
This is down from 7.7% growth in 2013, and the recent data shows that the economy is clearly off to a slower start to the year.
Before we launch into the data, it’s important to remember that part of the slowdown is intended by China’s policymakers as they try to clamp down on lax lending standards and rebalance the economy toward domestic demand driven growth.
But it isn’t clear just how much control they are able to exercise over this slowdown.
Here’s a look at the recent slowdown in charts.
First, we got the disappointing manufacturing PMI data. The official number fell to an eight-month low of 50.2 in February, while the unofficial HSBC number reflected contraction, falling to a seven-month low of 48.5. What was striking was the broad based-nature of the decline with most of the sub-indices of the PMI report falling last month.
Exports plunged by 18.1% in February. Many economists blamed the Lunar New Year holiday and the higher base created from over-invoicing last year for the stunning decline. Adjusted for this “fake” trade data, exports were nevertheless up a modest 5% in the Jan-Feb period. Looking at Feb alone, if we excluded exports to Hong Kong “so as to adjust for the over-invoicing problem last year, export growth would still have been a meager 2.4%,” Societe Generale’s Wei Yao said.
Consumer and producer price inflation cooled in February. Consumer prices declined to 2.0%, from 2.5% in January. Meanwhile, producer prices were -2% in February from -1.6% the previous month. Cooling CPI gives the central bank room to easy policy. But producer prices have been down for two years now, and this is raising concerns about deflation.
New bank loans fell to 645 billion yuan in February missing expectations and falling from 1.32 trillion yuan the previous month. Total social financing also missed expectations, falling to 939 billion yuan from 2.58 trillion yuan the previous month.
Some economists do expect this data to pick up going forward. But Societe Generale’s Wei Yao notes that so far the credit slowdown was “mostly responding to higher interbank rates, as intended by the PBoC.” Here on out Yao expects it to be from “regulatory tightening of the Document 107,” which is intended to clamp down on shadow banking.
Industrial production growth slowed to 8.6% in the Jan-Feb period, from 9.7% in December, the lowest reading since April 2009.
Year-to-date fixed asset investment (FAI) growth slowed to 17.9% in the Jan-Feb period, down from 19.6% in December. The real drag came from production capacity and manufacturing investment.
Retail sales slowed to 11.8% growth in the Jan-Feb period, from 13.6% in December. This has largely been attributed to crackdown on corruption and some argue that many consumers now shop online and that isn’t reflected in the data.
Property sales slowed in the Jan-Feb period as well. New home sales in floor-space terms were up 1.2% in the Jan-Feb period, down from 7.2% in Q4 2013. And in value terms were down 5%, from 13.1% in Q4 2013. New home starts growth were down 29.6% on the year. Property sales are often considered a key gauge for China’s commodity demand.
And of course copper prices fell to four-year lows on concerns of both a Chinese economic slowdown and about fears over China’s copper-backed loans. Remember, a credit crunch sends money market rates higher. And at times like this, copper imports rise because companies use copper as collateral to obtain loans.
Bank of America’s proprietary leading economic activity pulse (LEAP) index slowed to 4.2% in February. This is down from 6% the previous month, and 10% in December. BAML cut its 2014 growth forecast to 7.2% from 7.6%.
This chart from Jeff Gundlach takes a longer view and shows the declining consensus GDP forecasts on China. Gundlach expects forecasts for 2014 to continue falling.
“With this set of weak readings in Jan-Feb, the room for data to be worse in March and coming months could be limited. Based on some high-frequency data like daily steel production, we have seen some improvement in activity from late February and we expect a turnaround in March data,” writes Bank of America’s Ting Lu.
But he’s part of the group of economists that have started downgrading their GDP forecasts.
Societe Generale’s Wei Yao isn’t quite as optimistic and writes that this is just “the start of China’s weak data season.”
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