China: Mixed signals beneath the surface
- Robust April economic growth, driven by retail sales, offers some optimism
- But rebound mainly due to favorable base effects from last year's lockdown
- Weakness evident in month-on-month data and leading indicators
- Slowing corporate and mortgage lending indicated weak investment and property sectors
- Supportive policies warranted for balanced, sustainable recovery
The year-over-year growth in China's April economic data may at first glance seem promising. Retail sales grew at an impressive 18.4% y/y in April, pointing to resurgent consumer demand. Fixed asset investment increased 4.7% in the first four months, with resilient infrastructure spending by state-owned companies offsetting soft property construction. Industrial production rebounded at a 5.6% pace, up from 3.9% in March.
However, much of the rebound stems from easy base effects compared to last April when Shanghai and other cities were largely shut down. This artificially boosts the year-over-year growth rates and masks underlying weaknesses. On a month-on-month basis, industrial production contracted 0.5% in April compared to March. Monthly automobile sales also declined as consumers adopted a cautious stance while automakers reduced prices.
While high-frequency data showed spending surged during the Golden Week holiday, it likely represents pent-up demand rather than sustainable consumption growth. Consumers have probably already taken most "revenge travel" trips, evidenced by the cooling services PMI. Modest 3.8% real income growth - below pre-Covid’s 6.7% - indicates households lack the purchasing power for persistently higher spending. This is reflected in the benign core inflation of 0.6%-0.7% over the past three months. Both NBS and Caixin manufacturing PMIs slipping below the expansion threshold in April illustrated the manufacturing sector is in no position to pick up the growth baton from consumption.
Plunging new loans in April pointed to deeper challenges. The slowdown in medium to long term corporate loans suggests that private investment is unlikely to rebound swiftly. Declining mortgage lending despite supportive measures shows profound difficulties for the property sector. Externally, persisting strains in the banking sector and higher interest rates in the US and Europe are expected to pose lingering pressure on China’s exports.
The PBOC's decision to hold the MLF rate steady on Monday makes sense given the unlikeliness of Fed rate cuts at this juncture. Yet the authority still has tools at its disposal to keep monetary conditions accommodative. By lowering banks' deposit rate ceilings recently, the PBOC has reduced lenders' liability costs. This creates room for banks to cut loan prime rates in the coming months.
The PBOC may also trim the required reserve ratio in 2H as around RMB2.9 trillion worth of medium-term lending facilities mature. Replacing these expiring funds through broad RRR cuts would inject permanent, low-cost liquidity into the banking system. The authority is also expected to deploy structural tools complementing fiscal policy to bolster credit growth, such as re-lending programs for infrastructure financing.
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