The first string of Chinese data is out but before we jump into what the numbers mean, here’s a quick recap:
Ting Lu, China economist for Bank of America-Merrill Lynch gives us an insight into the potential implications of the May data points so far:
- Industrial production – If there isn’t a “significant rebound in June” then IP growth could be around 9.6 per cent YoY in the second quarter, below 11.6 per cent the previous quarter. IP represents 40 per cent of economy and poor growth in IP data could see China’s Q2 GDP growth at anywhere between 7 – 7.5 per cent and could very well bring street cuts of 2Q GDP growth forecasts.
- CPI and PPI – Consumer prices fell more than expected in May, and PPI also fell further giving policymakers room for more stimulus measures and utility price hikes. CPI should fall further in coming months after “slumping oil prices” (and lets not forget China announced a fuel-price cut yesterday, the steepest cut since 2008).
- Fixed Asset Investment (FAI) – A quick breakdown of the data, property FAI growth rebounded to 18.0 per cent in May, from 9.2 per cent in April. Railway investment growth was -35.2 per cent, compared with -46.9 per cent the previous month. Manufacturing FAI jumped to 28.2 per cent in May, from 22.7 per cent the previous month. The leading indicators of FAI growth, total planned investment in newly started projects jumped to 28.2 per cent, from 191.9 per cent in April. “The pickup of FAI growth in May suggests that the govt was ramping up infrastructure and social housing investment to bolster the economy on the weak economic data in April.”
- Retail sales – While headline retail sales number eased in May compared to April, inflation adjusted numbers show that real retail sales inched higher to 11.0 per cent in May, from 10.7 per cent in April. Sales of home appliances were weak and auto retail sales by volume is yet to be released but could rise in May based on preliminary data.
The Big Picture
Market reactions to be mixed since industrial production growth confirmed the trend of slowdown since April, but after the interest rate cut on Thursday, market were possibly pricing in much worse. With FAI coming in line with expectations, retail sales holding up, and larger than expected drop in inflation the government has more room to easy policy. Ting says:
“We expect the govt to start and speed up more projects on the one hand and to make project financing easier via cutting RRR/rates, approving more enterprises bonds and lifting more lending restrictions. However, without Greek exit from eurozone, we expect the size of overall stimulus could be relatively small (slightly below 1% of GDP).”