China: Reading through flattening growth figures

Although April data flattened somewhat on dissipating low-base effect, headline growth versus the previous month was favourable.
Samuel Tse17 May 2021
  • April data flattened somewhat on dissipating low-base effect
  • The positive outlook paved way for monetary policy normalisation and curb on excessive borrowing
  • Implication to forecast: The 1Y Loan Prime Rate is expected to stay at 3.85%
  • Implication to investors: Tightening will slow down given the …
  • … faster-than-expected drop in credit growth in April
Photo credit: AFP Photo

Although April data flattened somewhat on dissipating low-base effect,  headline growth versus the previous month was favourable. 

Industrial activities held up well. On MoM basis, it grew by 0.52%. Production of machineries and medicine saw more appreciated growth. Amid the ongoing green initiatives, that of alternative fuel vehicles soared by 175.9% YoY. Leading indicators such as official and Caixin manufacturing PMIs recorded continued expansion. Global economic recovery will boost the export-led industrial production. Composites PMIs for trading partners such as the US and Eurozone hit years highs. China’s trade surplus YTD soared by 85.7% and 176.2% compared to same period in 2019 and 2020 respectively.

Retail sales increased by 0.32% over the previous month on strong consumption sentiment after COVID-related restriction were further relaxed. Domestic travellers during the Qing Ming Festival Holiday already reached 90% in 2019. Non-necessities such as jewellery shot up 48.3% YoY, pointing to a buoyant consumption sentiment. F&B also leapfrogged by 46.4%.

Looking ahead, retail sales will likely sustain amid the absence of outbound travel. Domestic travel reached 230mn people during week-long Labour Holiday, representing a 119.7% YoY growth, and is 3.2% higher than that of the 2019 labour holiday week. Improving labour market condition also helps. Latest disposable income data (1Q) saw a 13.7% YoY jump (14.6% higher than 1Q19).  Services PMI, an early indicator that largely mirror retail sales performance, stayed in the expansion territory for 12 months.

Against the strong growth momentum, fixed asset investment (YTD) saw stronger MoM growth of 1.49%. Private investment rose by 21.0% YoY YTD, compared to 26.0% in March. SOEs by investment also increased by 18.6%. By industry, manufacturing investment was well supported by the strong industrial production. Anchoring the start of special bond issuance (jumped by 655.4% MoM), infrastructure investment rose by 18.4%. Meanwhile, the growth rate of computer & telecommunication, at 30.8% in April, remained higher than the headline FAI amid Beijing’s effort in technology self-sufficiency.

The positive outlook paved way for monetary policy normalisation and the curb on excessive borrowing. M2 slumped to 8.1% YoY in April from 9.4% in March despite PBOC adviser Ma Jun indicated that the growth in the broad money supply in 2021 should be kept at about 9%. Aggregate financing extension slowed to 11.7% from 12.3% on tapering of both loan and shadowing banking growth. Meanwhile producer inflation continued to accelerate. PPI rose 6.8% YoY in April on surging commodity prices, up from a 4.4% rise in March. Although pass-through to consumer price was limited thus far (CPI rose by 0.9% only), recovery in consumption sentiment will spur stronger inflation in months ahead. However, fear over further tightening may be overdone. The authority may slow down its withdrawal given the faster-than-expected drop in credit growth in April. The 1Y Loan Prime Rate to be announced that week is therefore expected to stay at 3.85%. 

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Samuel Tse 謝家曦

Economist - China & Hong Kong 經濟學家 - 中國及香港
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