It has been another eventful month for the world’s second largest economy, with some disappointing economic data casting doubt over China’s growth prospects and the property market. At the same time, the People’s Bank of China (PBoC) appears to have helped put a stop to a sell-off of the renminbi as exports and imports stabilised and help restore some confidence in the economy.
China’s deflating property bubble
A deluge of mixed economic data out of China recently and a softening property market have raised concerns about the speed of the slowdown in economic growth. It’s a vicious cycle whereby fears of a slowing market weaken property prices which in turn leads to a further deterioration of growth. During April China’s new-home prices rose in the fewest cities in over a year, with prices climbing in only 44 of the 70 cities tracked by the government.
The cycle has only just begun but it is nearing its tipping point, at which time the drags on growth could spiral out of control. In saying that, we believe Beijing has the tools and the will to manage the deceleration in growth and the deflation of China’s property bubble. In fact, the deceleration in property prices has already prompted the relaxation of property curbs, which were installed to prevent the property market overheating further, in some cities.
Another month of disappointing economic data
During April, industrial production grew at its slowest pace since 2009 at 8.7% y/y, missing an expected acceleration to 8.9% y/y, and inflation took a big hit. Consumer prices rose by the least amount since late 2012, with headline CPI jumping 1.8% y/y, which was significantly lower than an expected rise of 2.1%. While the slower pace of inflation technically gives Beijing more room to loosen policy if needed, it also highlights that domestic demand may be softer than previously anticipated. Retail sales also took a hit over the same period and printed lower than consensus estimates, with the headline number falling to 8.7% from 8.8% in March.
There was a slight rebound in both major readings of manufacturing PMI in China, but they were still lower than expected. HSBC’s gauge of private sector manufacturing PMI jumped to 48.1 in April (expected 48.4) from 48.0 in the prior month. Official manufacturing PMI also rose, with the index climbing to 50.4 (expected 50.5) last month from 50.3. There was some better news later in the month, with HSBC’s preliminary reading of manufacturing sentiment for May rising to 49.7.
The yuan stabilises as trade rebounds
While most of the economic data released by China this month disappointed the market, a rebound in exports and imports during April was a very welcome surprise. Exports and imports increased 0.9% and 0.8% y/y respectively, beating expected falls of 3.0% and 2.1% respectively. This comes on the back of consecutive bad months for trade figures in China, thus April’s data is helping to ease concerns about the health of the economy, which in turn makes the yuan more attractive. At the same time, the PBoC looks to have assisted in a slight strengthening of the renminbi at the beginning of the month, before maintaining a relatively tight band with its daily reference rate.
Another important month ahead for China
The coming month will be vital to investor sentiment surrounding China’s economy. The market wants assurances that April’s rebound in trade wasn’t a one off and that’s May flash reading of private sector PMI is accurate. This means that May’s trade and manufacturing figures are likely to be very important, but that isn’t going to diminish the impact of other economic data. A solid month of strong economic figures could see the yuan begin to strengthen again, after falling around 2.8% against the US dollar since the beginning of the year.
Data watch for June:
· Official May Manufacturing PMI – 1st
· HSBC May Manufacturing PMI – 3rd
· Trade figures for May – 8th
· May’s CPI and PPI figures – 10th
· Industrial production, retail sales and fixed asset investment – 13th
· HSBC June Flash Manufacturing PMI – 23rd