China holds fire on rates, posts ‘shockingly weak’ activity
Get ready for headlines talking about Chinese deleveraging hitting the economy – except it isn’t even deleveraging yet! China is walking more of a tightrope than markets believe – and the data underline that issue clearly.
BEIJING: China’s economy is finally starting to cool under the weight of a multi-year crackdown on riskier lending that is pushing up borrowing costs for companies and consumers, with data yesterday pointing to a broad slowdown in activity in May.
China’s central bank sparked concerns over the health of the economy earlier in the day when it left short- term interest rates unchanged, surprising markets which had expected it to follow a hike by the Federal Reserve, as it has tended to do.
Industrial output, investment and retail sales all grew less than expected, suggesting further weakness ahead if Beijing perseveres with its crackdowns on pollution, questionable local government spending and off- balance sheet ‘shadow’ financing.
The data, which showed the slowest investment growth in over 22 years, “was all shockingly weak by Chinese standards,” economists at Rabobank said, adding that the readings may explain the central bank’s decision to keep rates on hold.
“Get ready for headlines talking about Chinese deleveraging hitting the economy – except it isn’t even deleveraging yet! China is walking more of a tightrope than markets believe – and the data underline that issue clearly,” they said.
China has been walking a fine line between rolling out measures to curb financial risks and pollution and tapping the brakes so hard that business activity slows sharply.
Much of their effort so far has focused on the banking sector rather than corporate debt reduction or deleveraging – possibly explaining why China’s headline growth has been so surprisingly solid.
GDP has expanded at a steady
Rabobank economists
6.8 per cent for three straight quarters.
But official and unofficial gauges are now showing the regulatory crackdown is starting to filter through to the broader economy, with companies complaining it is harder to get financing and a growing number of firms defaulting on bonds.
China’s fixed-asset investment (FAI) growth cooled to 6.1 per cent in January-May from the same period a year earlier, the slowest pace since at least February 1996.
Analysts polled by Reuters had expected it to remain steady at 7.0 per cent, the same as in JanuaryApril.
Growth in infrastructure spending, a powerful economic driver last year, slowed to 9.4 per cent in the first five months, from 12.4 per cent in January-April.
“The biggest drag on FAI here is infrastructure investment,” said senior China economist Betty Wang at ANZ.
But Wang noted there are still many infrastructure projects in the pipeline, and it is a relatively easy sector for the government to inject stimulus if it chooses.
“Sure, local governments are more restrained by the crackdown on debt, but if there is a very large downside risk to the economy, the government is fully capable of propping it up again.”
May industrial output rose 6.8 per cent from a year earlier, versus estimates for a small dip from April’s 7 per cent.
Retail sales grew 8.5 per cent in May, the slowest since June 2003, according to Reuters calculations.
Analysts had expected a slight pick-up to 9.6 per cent.
The slowdown was due to seasonal factors and consumers delaying purchases, Mao Shengyong, a spokesman at the National Bureau of Statistics, told reporters. Auto sales dipped 1 per cent. China’s auto industry said on Monday that some car buyers were holding off on purchases, presumably until import tariffs are cut from July 1.
Mao said the economy will maintain relatively sound momentum in the second half, and was confident it will grow around 6.5 per cent for the full year, in line with the government’s target and Reuters polls.
But the writing is on the wall for slower activity in coming months after data early this week showed overall credit growth cooled.
Private sector investment, which accounts for about 60 per cent of overall investment in China, also cooled.
Trade was one of the few bright spots in May data, but analysts expect exports may also lose momentum in coming months amid rising trade tensions with the United States.
Chinese exporters have been front-loading their shipments due to changes in the international trade environment, commerce ministry spokesman Gao Feng said on Thursday.
A third round of Sino-US trade talks early this month ended with few signs of progress, as Beijing warned that any trade and business deals reached with Washington would be void if it implemented tariffs. — Reuters