150513 china weak data, more stimulus

China Watch Weak data, more stimulus

Group Economics Emerging Markets Arjen van Dijkhuizen +31 20 628 8052

13 May 2015 •

After economic growth dropped to to 7.0% yoy in Q1, recent data show that Q2 has started on a weak note as well.

•

This has triggered further easing measures such as the recent cuts in policy rates and banks’ reserve requirements.

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We expect the authorities to add further measured monetary easing and targeted stimulus to keep the slowdown gradual.

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However, downside risks are rising and the path to deleveraging will remain lengthy and wobbly.

April data point to further weakness

Markit’s services PMI rising to a four-month high of 52.9 in

The batch of April data published over the past weeks show an

April. As a result, the composite output index fell to a 3-month

ongoing picture of weakness in the manufacturing sector,

low of 51.3 in April (March: 51.8). Meanwhile, the official non-

driven down by weak domestic demand and the ongoing

manufacturing PMI fell to an historic low of 53.4 (March: 53.7),

property slump, while export growth is faltering. While some

but remains clearly above the neutral 50 mark. All in all, the

Q1 data are typically distorted by the timing of the Chinese

development of the manufacturing and services PMIs are in

New Year, this suggests that Q2 started on a weak note as

line with the ongoing shift away from industry and investment

well, despite various easing measures launched in recent

towards services and consumption.

months.

Growth of exports and imports remains negative The activity data published today show that retail sales and

The latest trade data do not bode very well either. Exports

fixed investment cooled down further. Annual growth of retail

contracted by 6.4% yoy in April, versus a consensus

sales dropped to a 9-year low of 10% yoy in April (March:

expectation of +1.6%, but not as steep as in March (-15%).

10.2%), while fixed asset investment growth tumbled to a

Looking over a longer time span, annual export growth over

record low of 12% yoy (March: 13.5%). A small silver lining

the past twelve months averages 8.7% yoy (past four months:

came from industrial production growth, which recovered

5.9% yoy). While the fading out of overinvoicing practices and

somewhat to 5.9% yoy in April (versus 5.6% in March)

other ad hoc factors may partly distort monthly figures, recent

although remaining relatively weak by recent standards.

export developments are also a reminder of the ongoing real effective appreciation of the yuan. Not surprisingly, annual

Monthly activity indicators remain weak

export growth to Japan and the EU was clearly negative in April, with the yuan having appreciated substantially versus the

% yoy

25

40

euro and the Japanase yen over the past year.

35 20 30 15

consensus expectation (-12.2% yoy) and the March number

20

(-12.7%). Still, this ongoing slide does not only reflect the

15

weakness of domestic demand, but also the drop of import

10 08

09

10

11

Industrial production (lhs) Fixed investment (rhs)

12

13

14

consecutive month in April (-16.2% yoy) and weaker than the

25

10 5

Meanwhile, import growth was negative for the sixth

15

Retail sales (lhs)

Source: Thomson Reuters Datastream

prices (in particular energy and other commodities) are still much lower than a year ago despite their recent rebound.

Inflation is bottoming out, but remains below target …

After falling to a cyclical low of 0.8% yoy in January, inflation seem to have bottomed out. CPI inflation rose marginally to

Manufacturing and services PMIs still divergent The forward looking manufacturing PMIs do not paint a bright picture either. HSBC/Markit’s index fell to a one-year low of 48.9 (March: 49.6). Meanwhile, the official manufacturing PMI remained at 50.1 in April, just above the neutral 50 mark. The weakness in the manufacturing and industrial sectors is partly compensated by the services sector’s resilience, with HSBC/

1.5% yoy in April (from 1.4% in February/March), but remains far below the 2015 target of 3%. This in in line with our base scenario, as we anticipate the stabilisation of commodity prices to drive a gradual pick-up in inflation in the course of 2015.

Core inflation remained unchanged at 1.5% yoy in April.

Meanwhile, producer price inflation remained negative (since March 2012), but also seems to be bottoming out in recent

2

China Watch: Weak data, more stimulus – 13 May 2015

months thanks to the stabilisation of commodity prices. House

months, the main policy rate is still high compared to current

prices dropped by a record low of 6.1% yoy in March.

inflation levels, leaving room for further cuts. We have penciled in 25-50 bps of additional policy rate cuts for the remainder of

Inflation is bottoming out, remaining below target

this year. Furthermore, there is also room for a weaker exchange rate to support exports and inflate the economy.

% yoy

8

… and ongoing targeted stimulus

6

What is more, the authorities continue to use more direct instruments to stimulate growth as well, such as ‘pledged

4

supplementary lending’ to policy banks (e.g. to China 2

Development Bank), which are earmarked for instance for infrastructure or renovation. The government also continues

0

with targeted fiscal stimulus. After frontloading a bunch of -2

investment projects earlier this year, the authorities recently 09

10

11

Headline

12

13

Core

14

15

Policy rate

Source: Thomson Reuters Datastream

announced tax measures to stimulate employment and fresh initiatives to boost infrastructure investment. Last month, downpayment requirements for second homes were lowered to help the ailing real-estate sector. Meanwhile, the authorities

… opening the door for further policy rate cuts In reaction to the weak data, the Peoples Bank of China (PBoC) cut policy rates further last weekend, aiming to drive bank lending rates down. The 1-year best lending rate was reduced by another 25bp to 5.10%, following similar moves in November and February. The PBoC also cut the benchmark deposit rate by 25bp to 2.25%, but left banks’ room to manoeuvre unchanged as the “variation margin“ was raised to 1.5 times the benchmark rate.

We do not expect unconventional QE policies, …

The recent easing measures did not surprise us, as our baseline scenario assumes ongoing measured monetary easing and targeted (fiscal) stimulus to prevent growth from falling significantly below the 2015 target of 7%. We do not think that the PBoC is ready to follow other major central

can stimulate banks to buy local government bonds, for instance by making them eligible as collateral for PBoC or other loans.

Outlook and main risks Although downside risks are increasing, we assume the authorities remain committed to add support as there is still ample room for monetary and fiscal stimulus. Hence, we expect China’s slowdown to remain gradual and have left our 2015/16 growth forecasts unchanged at 7% so far. Key risks stem from elevated overall debt levels, overcapacity in several sectors including real estate, stronger fiscal pressures, the external environment and the geopolitical situation. While the measures taken to contain shadow banking and to address high local government debts are steps in the right direction, the Chinese path to deleveraging will remain lengthy and wobbly.

banks to implement unconventional QE policies, although market speculation for such a scenario had increased recently.

Some market participants claimed that that would come in the form of the PBoC buying local government bonds directly, connecting this to the CNY 1tn local government debt swap

Key forecasts for the economy of China 2012

2013

2014e

2015e

2016e

GDP (% yoy)

7.7

7.7

7.4

7.0

7.0

CPI inflation (% yoy)

2.6

2.6

2.0

2.0

2.5

programme announced in March.

Budget balance (% GDP)

… but more measured monetary easing …

Our view is not only based on the PBoC’s denial that it was

-1.6

-1.9

-2.0

-2.5

-3.0

Government debt (% GDP)

15

15

16

17

19

Current account (% GDP)

2.7

2.1

2.0

2.5

2.0

Gross fixed investment (% GDP)

45.7

45.9

45.5

44.2

43.5

Gross national savings (% GDP)

50.3

49.7

48.6

47.9

46.6

USD/CNH (eop)

6.3

6.1

6.2

6.4

6.5

EUR/CNH (eop)

8.2

8.4

7.5

6.0

7.1

considering QE. We feel there is plenty of room for more easing using other instruments, while there is no ‘zero bound issue’ as the benchmark deposit rate is currently 2.25%.

Banks’ reserve requirements (RRRs) were cut by in total 150 bps recently, also reflecting capital outflows turning negative, but at 18.5% remain high by international standards. We expect further RRR cuts to add more liquidity to the banking system. Moreover, despite a cumulative 90bp cut in recent

Budget b alance, current acc. for 2014,2015 and 2016 are rounded figures

Source: EIU, ABN AMRO Group Economics

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China Watch: Weak data, more stimulus – 13 May 2015

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