Growth slowed for nearly all major indicators in April, with the exception of real estate, which is now nearing an inflection point
by Brian Jackson, China Economist, IHS Global Insight
The recent ‘authoritative figure’ interview in our view delivered one key credible message – growth will continue to decelerate and then stabilize over a 2-3 year window, rather than rebounding in any appreciable manner. With that in mind, April’s deceleration is of little surprise, with modest policy tweaks to increase growth support likely in the near term.
Aggregate Financing:
· Total social financing remained erratic in April, and is likely to swing upward again later this quarter. New financing dropped over CNY 1.5 trillion from a month prior to a net flow of only CNY 751 billion, about half the monthly average in the past year. Slower growth in domestic currency loans and corporate bonds accounted for about two-thirds of the slowdown compared to March.
Industrial Output:
· Industrial output growth slowed in April. This is broadly in line with expectations given there was little doubt that the 6.8% surge in March was unsustainable. Initial data indicate slower industrial expansion in April was concentrated in sharp slowdowns in the mining and utilities sectors; manufacturing output also moderated, but to a much smaller degree. Within manufacturing the largest slowdown was in the steel smelting and pressing sector. Real growth there slowed by 1.2 percentage points to 2.5%, the largest slowdown among the twenty or so sectors initially reported.
Investment:
· Investment growth similarly moderated in April, due mostly to a drawdown in ‘other services’ investment. A slowdown from 10.7% to 10.5% headline FAI (fixed-asset investment) growth is almost entirely due to public utilities management investment, included with services, which moderated from 31% to 28.3% growth. In recent months, public utilities management was a positive and expanding contributor to infrastructure investment growth, which comes at a time when investment in more traditional categories of government largesse were moderating. For example, railway investment is growing in the low single digits, while highway investment slowed from around 17% in 2015 to 10.4% in April. The IHS view is that this moderation, from blistering speeds in the first quarter, is healthy for the overall economy, although will certainly cause some volatility in markets, especially those related to construction materials.
· Sectors with faster than average and accelerating investment growth include food processing, textiles, medicine, electrical equipment and machinery, power and heating supply (included in industry, unlike utilities management), healthcare, and culture, sports and recreation. With the exception of transportation (infrastructure), most service categories are still growing faster than average, although in some cases at a decelerating pace.
Real Estate:
· Real estate is one of the few positives in monthly data, with most growth indicators continuing to boom despite slowdowns elsewhere in the economy. Residential floor space completed, sold and started all grew at a faster pace, often the fastest pace of expansion since 2013. Area under construction grew at a stable rate, while persistent contractions in land purchases moderated. Overall the real estate data continues to improve and will provide upside for the real estate sector component of services growth in GDP in the second quarter.
· Unfortunately, the real estate data, one of the bedrocks of growth in the first quarter, is not strictly positive. While growth in most indicators accelerated in April, the degree of acceleration was relatively tepid compared to the boom earlier in the year. Most indicators are now approaching an inflection point, beyond which we expect real estate growth will remain positive but decelerate and drag down market sentiments with it. And, while double-digit growth rates are undoubtedly very impressive, levels data remains much less encouraging. Most clearly, starts growth of 38.8% is against an incredibly weak base in the first half of 2015. In levels, the 296 million square meters (about 2.96 million units) started through April 2016 compares to a peak of 413 million square meters during the same time in 2013. China’s real estate market remains a long ways below its peak, and would need to maintain ultrafast growth for at least another year to once again reach those levels – unlikely based on recent momentum.
Retail Sales:
· Retail data showed the most modest changes in April, but unfortunately is also one of the most concerning. While headline retail growth slowed only marginally, it is one of the few indicators that are relatively free from government intervention. While peaks and troughs in investment, industrial output and housing are often attributable to a change in government policy, be it large or small, retails stability and fast pace of growth are often seen as the one immutable in China, as households hoard wealth during booms to later smooth consumption during busts. The slowdown to the 10% threshold in April is concerning, if only for the reason that it represents a psychological barrier which will unsettle markets, at least briefly, if broken. In April all categories of retail sales slowed, with the exception of stability or meager accelerations in categories related to new home purchases. Automotive sales slowing by half is the largest single contributor to the April slowdown in consumption.
Outlook & Implications:
While real estate data is eye catching, most observers have seen eye watering growth rates in home prices and sales but limited upside for headline GDP growth already in the first quarter. Continued bumper sales of housing will continue to help the services component of GDP in the second quarter, but we think is very probable to recede somewhat later in the year.
Real estate aside, most other parts of China’s economy continue to grind, slowly, towards their new long term equilibrium. Industrial output and investment surges in March led many in China to expect, or unrealistically wish for, a sustain rebound in the economy. In our view this is almost impossible. The only action that could credibly buoy growth over a long period of time is a massive new round of government stimulus. While there are certainly many types of stimulus projects ongoing in China today, in general they pale when compared to the 2009 stimulus and debt creation. Moreover, we view the recent ‘authoritative figure’ interview as delivering one key credible message – growth will continue to slow down and then stabilize over a 2-3 year window, rather than rebounding. With that in mind, April’s deceleration is of little surprise.