Over the long weekend, China dumped a huge amount of macro data for May. The upshot is that the economy continues to slow but at more shallow rate than April. Stimulus is already having some effect and the chances of more has declined.
We begin with the news that China’s CPI inflation continued with its downward trend in May.
The headline consumer prices index inflation fell to 3.0% yoy, the lowest reading since June 2010, down from 3.4% yoy for the previous month, and below market expectations of 3.2%. On a month-on-month basis, CPI fell by 0.3% in May, down from a fall of 0.1% in the previous month.
We are seeing sharply lower food prices in May, which fell by 0.8% on the month, while on a year-on-year basis, food prices inflation is down to 6.4%. Non-food prices increased by 1.4% compared to a year ago, while it remained unchanged on a month-on-month basis.
On another note, the producer price index is down also to –1.4% yoy, from –0.7% yoy, and again below consensus of –1.1%.
This data further confirms the underlying weakness of the Chinese economy. The month-on-month CPI inflation is in negative territory for 2 consecutive months and is further evidence to support the idea that China is already in a debt deflationary environment. The lower-than-expected inflation figure also explains the action two days ago by the People’s Bank of China to cut interest rates.
I believe inflation will continue to trend lower owing to the underlying weakness of the economy and pointing to sluggish aggregate demand because the economy already has significant over-capacity.
In better news for the longer term, the latest inflation figure of 3.0% in May means the real deposit rate for 1 year have turned even more positive in May.
And although the PBOC cuts interest rates 2 days ago, they are also lifting the ceiling banks can priced their deposit rates, which means that bank deposits rates can now potentially go even higher than before the rate cut, and that means real interest rates will most probably trend even higher as the inflationary environment has turned into a deflationary.
Clearly this potentially positive for a Chinese economy looking to rebalance towards consumption led growth.
However, at this stage, the evidence of that rebalancing is very mixed. The May monetary statistics was more positive than consensus, with monetary supply growing faster than expected and new loans in-line with the whisper number but ahead of consensus estimate.
M2 money supply growth was 13.2% yoy in May, up from 12.8% yoy in April and above market estimate of 12.9%. M1 money supply increased by 3.5% yoy, up from 3.1% yoy in the previous month.
Net new loans came in at RMB793.2 billion, well ahead of market expectations of RMB700 billion, but more or less in-line with what informed sources said before (i.e. RMB800 billion) after the rush to lend in the final week of May (or as we speculated, banks being forced by the government to lend for the “stimulus”). And as the sources said, there is a slight pick-up in medium & long-term loans, although the amount is still low relative to the period when the economy was on steroids (i.e. during the previous round of stimulus).
The biggest surprise, however, came from the deposit side, with Chinese yuan deposits jumping RMB 1.22 trillion despite various sources saying that deposits are falling throughout the month.
On the downside of the rebalancing equation, China’s retail sales growth missed estimates. Retail sales increased by 13.8% yoy in May in nominal terms, below consensus forecast of 14.2% yoy. In real terms, retail sales growth increased slightly from 10.7% yoy in April to 11.0% yoy in May.
On a month-on-month (not-seasonally adjusted) basis, however, retail sales increased by 0.84% in May, falling from the 1.13% growth in April.
After seasonal adjustment, month-on-month growth in May was down from 0.96% to 0.84%, with the downward trend intact.
Also soft for the month but showing a small rebound was China’s fixed asset investment. Year-to-date fixed asset investment increased by 20.1% compared to the same period a year ago in nominal terms, very slightly above the consensus estimate of 20.0%, but down from 20.2% yoy in April. Growth in investment by state-owned enterprises has picked up from growth in high single-digit rate for 3 months to 10.0% yoy.
Meanwhile, growth in real estate investment continues to soften, if at a slower pace. Real estate investment YTD increased by 18.5% compared to the same period a year ago, down from 18.7% yoy.
Better news was available in China’s May trade data, which showed a strong rebound from April’s slump. Exports increased by 15.3% compared to a year ago to US$181.141 billion, beating estimates of 7.1% yoy and up from 4.9% yoy. Imports increased by 12.7% compared to a year ago, beating estimates of 5.5% yoy and up from 0.3% yoy.
On a month-on-month basis, exports increased by 10.9% in May, while imports increased by 12.2%. On a seasonally adjusted basis, exports increased by 1.4% compared to April, while, imports decreased by 1.1%.
Trade balance for May was US$18.699 in surplus, above consensus estimate of US$16.4 billion, and slightly higher than US$18.43 billion for the previous month.
The rebound in exports growth came from the US among major trading partners.
Although the overall growth was still weak by historical standards, this was a good report (relative to the market expectation), suggesting that although both domestic and external demand has trended lower, the pace of weakening has stabilised somewhat, although I do not believe this is the end of the slowing unless we could see some stabilisation in the situation in Europe in the next few months, which is not my base case.
The sum of the variables described above was a still weak industrial production figure for May, increasing only slightly from April, up 9.6% compared to a year ago (in real terms), recovered slightly from 9.3% yoy in April, but below consensus of 9.8% yoy. On a month-on-month basis, industrial production increased by 0.89%, up from 0.35% in April.
Electricity power output growth, which is widely regarded as a more accurate proxy of China’s economic growth, rebounded from 0.7% yoy of April to 2.7% yoy, although it is still pointing to a sharp slowdown in economic activity. Meanwhile, rolled steel output growth continued to fall from 7.9% yoy in April to 6.3% yoy in May.
So, in total, it is clear that the Chinese economy has been slowing more than most thought it would. The disappointment over the April’s data prompted the market to revise growth forecasts downward. The May data has not been as bad as the market thought, especially after the surprise rate cut that led many (including me) to conclude that the coming data would look ugly. Better than bad data suggests that while the economy is still weak, further easing, especially large scale stimulus, should be off the table for the time being. My view is we are already seeing some effect of the piecemeal stimulus underway and I am growing skeptical that the Chinese government has given up on slowing the property market.