China's economy
stuttered unexpectedly in April with lower than expected output data,
softening retail sales and easing prices suggesting economic headwinds
might be stiffer than thought, requiring more robust policy responses to
counter them.
Industrial output expanded at its slowest annual pace in April in nearly three years, while fixed asset investment growth dipped to its lowest in almost a decade.
The weak growth in fixed asset investment signaled that the impact of a prolonged credit crunch in China's real estate sector, and of flagging demand from export markets, was more severe than first thought.
In fact, new loans in April were well below what most market observers had expected, helping to explain continued tight conditions for businesses and developers despite the gentle easing espoused by Beijing.
"The data suggests further deceleration of the economy at the start of Q2, with all segments of private demand weak," Dariusz Kowalczyk, economist at Credit Agricole-CIB in Hong Kong, said.
"This increases the pressure for policy stimulus, both fiscal and monetary. In particular given lower inflation, we believe that there is room for, and need for, such policy easing."
Chinese banks made 681.8 billion yuan worth of new loans in April, well below market forecasts of 800 billion yuan. Annual growth in China's broad M2 measure of money supply eased to 12.8 percent, below Beijing's 14 percent annual target.
Outstanding yuan loans at the end of April stood at 57.9 trillion yuan, a rise of 15.4 percent from a year ago but down from 15.7 percent in March. Economists had expected a 15.6 percent gain.
Beijing has been "fine-tuning" monetary and fiscal policy since the autumn of 2011 when a softening of demand from the European Union - China's biggest export market - and the impact of domestic policy tightening left firms struggling, but as the economy endeavors to regain upward momentum analysts say the time for more robust action may be drawing near.
"The government has attempted to revive the economy through largely passive means, but that strategy appears to be failing. A more assertive monetary policy is now needed," said Alistair Thornton, an economist with IHS Global Insight in Beijing.
"We believe the government will step up efforts to stimulate the economy, even as genuine concerns remain regarding the very real possibility of over-stimulating."
Industrial production rose by 9.3 percent in April, the lowest level since May 2009, while retail sales growth slowed to 14.1 percent, the weakest in 14 months.
Fixed asset investment rose by 20.2 percent in the first four months of the year, the slowest level since December 2002.
Property investment growth slowed to 9.2 percent, the lowest level since November 2009, according to Reuters calculations. New property investment in the first four months slowed to 18.7 percent growth, from 23.5 percent growth in the first quarter.
Power output growth, considered a particularly accurate measure of the real economy, slowed to less than 1 percent.
China's implied oil demand was uncharacteristically flat and may even have turned negative in April. That helped weigh on U.S. crude futures, which plunged below $100 a barrel in early May after creeping up to last year's higher levels in April.
The Australian dollar AUD=D4>, which trades as a proxy for China growth expectations, fell to nearly a five-month low on the data. The Hong Kong, Shanghai and Tokyo stock markets all slipped. Disappointing trade numbers on Thursday had heightened jitters about a slowdown in the global economy.
The weakness in global economic conditions was further underlined by India, where industrial output data for March showed a 3.5 percent year-on-year fall.
SCOPE TO EASE POLICY
China's two-year long battle with inflation and a property bubble are the after-effects of the stimulus program implemented to maintain growth in the wake of the 2008-09 global financial crisis.
Easing inflation potentially gives Beijing more scope to loosen policy to help the economy rebound from a first-quarter slowdown in growth.
Annual consumer inflation moderated to 3.4 percent in April from 3.6 percent in March, while food prices - which are of most concern for China's people and policymakers - rose by 7 percent, compared with 7.5 percent in March.
Food inflation has eased considerably this year and remains trending down, but non-food inflation may pose a risk and one that the central bank cannot ignore despite its policy bias towards supporting growth, said Zhang Zhiwei, China economist at Nomura in Hong Kong.
"I guess wage growth, those kind of structural factors are still playing out. The central bank probably still needs to look at things from a more cautious perspective," Zhang said.
China's inflation has fallen steadily from a three-year peak of 6.5 percent in July 2011 in response to a series of policy tightening steps and weakening economic activity.
Pork prices in particular have moderated, after inflation levels of over 50 percent last summer.
In its quarterly report released Thursday evening, the PBOC seemed more worried about the upside risks to inflation than about a sudden weakening in the economy - implying that the report was written well before April's signals became clear.
DOWNTURN RISK
Slowing growth has weighed on demand from China's manufacturing sector, which struggles with overcapacity in many sectors. April's producer price index (PPI) dropped by 0.7 percent after a 0.3 percent drop in March, overshooting expectations.
Retreating inflation has led investors to speculate that China may cut further the amount of cash it requires banks to hold as reserves to encourage them to lend more to cash-strapped firms.
China has cut the required reserve ratio by 100 basis points from a record high of 21.5 percent in two steps, the last a 50 bp cut in February. The market consensus is for 150 bps of more RRR cuts this year, according to the benchmark Reuters poll.
Annual export growth of just 4.9 percent in April, below a forecast of 8.5 percent, highlighted the risks to China's factory-focused economy of a fresh downturn in demand.
Continued softness in domestic demand is exacerbated by the impact of financial turmoil in Europe, a major export market.
High domestic stockpiles of metals and iron ore made it unprofitable to import more, helping explain a mere 0.3 percent rise in China's imports in April, far short of the 11 percent growth that had been forecast.
Other than pockets of government spending, overall investment is relatively soft, weighing on demand for steel for construction as well as household appliance purchases, said steel analyst Zhou Xizheng of CITIC Securities in Beijing.
"It's mostly because consumer confidence is weak," he said. "Investment is weak because no-one wants to take on more debt."
Asad Khan
Financial Analyst (CFB)
050-8774861
asad@cfb.ae
Industrial output expanded at its slowest annual pace in April in nearly three years, while fixed asset investment growth dipped to its lowest in almost a decade.
The weak growth in fixed asset investment signaled that the impact of a prolonged credit crunch in China's real estate sector, and of flagging demand from export markets, was more severe than first thought.
In fact, new loans in April were well below what most market observers had expected, helping to explain continued tight conditions for businesses and developers despite the gentle easing espoused by Beijing.
"The data suggests further deceleration of the economy at the start of Q2, with all segments of private demand weak," Dariusz Kowalczyk, economist at Credit Agricole-CIB in Hong Kong, said.
"This increases the pressure for policy stimulus, both fiscal and monetary. In particular given lower inflation, we believe that there is room for, and need for, such policy easing."
Chinese banks made 681.8 billion yuan worth of new loans in April, well below market forecasts of 800 billion yuan. Annual growth in China's broad M2 measure of money supply eased to 12.8 percent, below Beijing's 14 percent annual target.
Outstanding yuan loans at the end of April stood at 57.9 trillion yuan, a rise of 15.4 percent from a year ago but down from 15.7 percent in March. Economists had expected a 15.6 percent gain.
Beijing has been "fine-tuning" monetary and fiscal policy since the autumn of 2011 when a softening of demand from the European Union - China's biggest export market - and the impact of domestic policy tightening left firms struggling, but as the economy endeavors to regain upward momentum analysts say the time for more robust action may be drawing near.
"The government has attempted to revive the economy through largely passive means, but that strategy appears to be failing. A more assertive monetary policy is now needed," said Alistair Thornton, an economist with IHS Global Insight in Beijing.
"We believe the government will step up efforts to stimulate the economy, even as genuine concerns remain regarding the very real possibility of over-stimulating."
Industrial production rose by 9.3 percent in April, the lowest level since May 2009, while retail sales growth slowed to 14.1 percent, the weakest in 14 months.
Fixed asset investment rose by 20.2 percent in the first four months of the year, the slowest level since December 2002.
Property investment growth slowed to 9.2 percent, the lowest level since November 2009, according to Reuters calculations. New property investment in the first four months slowed to 18.7 percent growth, from 23.5 percent growth in the first quarter.
Power output growth, considered a particularly accurate measure of the real economy, slowed to less than 1 percent.
China's implied oil demand was uncharacteristically flat and may even have turned negative in April. That helped weigh on U.S. crude futures, which plunged below $100 a barrel in early May after creeping up to last year's higher levels in April.
The Australian dollar AUD=D4>, which trades as a proxy for China growth expectations, fell to nearly a five-month low on the data. The Hong Kong, Shanghai and Tokyo stock markets all slipped. Disappointing trade numbers on Thursday had heightened jitters about a slowdown in the global economy.
The weakness in global economic conditions was further underlined by India, where industrial output data for March showed a 3.5 percent year-on-year fall.
SCOPE TO EASE POLICY
China's two-year long battle with inflation and a property bubble are the after-effects of the stimulus program implemented to maintain growth in the wake of the 2008-09 global financial crisis.
Easing inflation potentially gives Beijing more scope to loosen policy to help the economy rebound from a first-quarter slowdown in growth.
Annual consumer inflation moderated to 3.4 percent in April from 3.6 percent in March, while food prices - which are of most concern for China's people and policymakers - rose by 7 percent, compared with 7.5 percent in March.
Food inflation has eased considerably this year and remains trending down, but non-food inflation may pose a risk and one that the central bank cannot ignore despite its policy bias towards supporting growth, said Zhang Zhiwei, China economist at Nomura in Hong Kong.
"I guess wage growth, those kind of structural factors are still playing out. The central bank probably still needs to look at things from a more cautious perspective," Zhang said.
China's inflation has fallen steadily from a three-year peak of 6.5 percent in July 2011 in response to a series of policy tightening steps and weakening economic activity.
Pork prices in particular have moderated, after inflation levels of over 50 percent last summer.
In its quarterly report released Thursday evening, the PBOC seemed more worried about the upside risks to inflation than about a sudden weakening in the economy - implying that the report was written well before April's signals became clear.
DOWNTURN RISK
Slowing growth has weighed on demand from China's manufacturing sector, which struggles with overcapacity in many sectors. April's producer price index (PPI) dropped by 0.7 percent after a 0.3 percent drop in March, overshooting expectations.
Retreating inflation has led investors to speculate that China may cut further the amount of cash it requires banks to hold as reserves to encourage them to lend more to cash-strapped firms.
China has cut the required reserve ratio by 100 basis points from a record high of 21.5 percent in two steps, the last a 50 bp cut in February. The market consensus is for 150 bps of more RRR cuts this year, according to the benchmark Reuters poll.
Annual export growth of just 4.9 percent in April, below a forecast of 8.5 percent, highlighted the risks to China's factory-focused economy of a fresh downturn in demand.
Continued softness in domestic demand is exacerbated by the impact of financial turmoil in Europe, a major export market.
High domestic stockpiles of metals and iron ore made it unprofitable to import more, helping explain a mere 0.3 percent rise in China's imports in April, far short of the 11 percent growth that had been forecast.
Other than pockets of government spending, overall investment is relatively soft, weighing on demand for steel for construction as well as household appliance purchases, said steel analyst Zhou Xizheng of CITIC Securities in Beijing.
"It's mostly because consumer confidence is weak," he said. "Investment is weak because no-one wants to take on more debt."
Asad Khan
Financial Analyst (CFB)
050-8774861
asad@cfb.ae
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