China delivered a poor batch of data in April, and that has some of the brightest minds in finance making gloomy predictions that the rebound in the world’s second largest economy might be ending soon.
Heavy industry is in bad shape and posted a 6% year-over-year growth rate in April, hurt by underperformance of state-owned companies and weak export growth in the country.
Weakened domestic demand resulted in lower-than-expected investment growth in infrastructure and factories of 10.5% in the first four months of 2016.
Even retail sales — an area that many count on to pick up the slack — grew less than expected at a 10.1% rate. Auto demand in particular was hit hard by the government’s gas prices hike.
More alarmingly, total social financing, a measure of liquidity in the system, fell in April to its lowest level since June 2013. That can be partly blamed on Chinese banks’ sharp pullback on new loans, which dropped to only 556 billion RMB ($85 billion) in April.
All these disappointing numbers came despite Beijing’s aggressive fiscal boost in the first quarter. Lending in the country suddenly exploded: Chinese banks extended more loans over a three month period than the entire US corporate-financing market ever has, according to Deutsche Bank. There were also several rounds of relaxation in property-purchase regulations, according to Morgan Stanley.
The sharp slowdown indicates an increased likelihood of a prolonged malaise in the world’s second-largest economy. The drop in lending also reflects China’s caution in fuelling a ticking time bomb while working toward its restructuring goal.
Unless lending jumps significantly from the April rate, China’s rebound could end soon, according to a Deutsche Bank research report led by Sebastian Raedler.
Here is Raedler on the issue (emphasis ours):
China’s growth rebound appears to be faltering: weakness in April’s total social financing (TSF) data appears to confirm a shift in policy stance away from aggressive credit easing. If the current TSF lending rate is maintained in May and June, the credit impulse will turn significantly negative in Q2, from sharply positive in Q1. To avoid this outcome, TSF lending would have to return close to Q1 levels, which we see as unlikely. If the credit impulse turns negative, this would point to downside for investment growth and PMIs, which should negatively impact commodity prices and European miners.
Junwei Sun, an analyst at Morgan Stanley, shares the same sentiment. While the firm is expecting a slowdown in growth from August to September, recent numbers have “raised the risk of the current rebound ending early,” according to a note circulated Monday.
The next shoe to drop could be property sales growth. If that also loses its mojo, it would confirm that “growth has peaked in the current mini-cycle,” Sun wrote.
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