China’s recent economic indicators are providing contradictory signals about the recovery, raising doubts about the growth outlook and fueling debate over whether Beijing needs to step up its stimulus.
(Bloomberg) — China’s recent economic indicators are providing contradictory signals about the recovery, raising doubts about the growth outlook and fueling debate over whether Beijing needs to step up its stimulus.
March data so far showed a surge in the services sector as consumers spend more on travel and restaurants now that Covid waves have eased. Yet, at the same time, inflation weakened in the month, pointing to subdued domestic demand.
On Thursday, official data showed a surprise jump in Chinese exports — after five months of declines — largely due to stronger demand from Asian markets and as factories returned to normal. That was in contrast to signals from purchasing managers’ surveys last week, which suggested a slowdown in manufacturing in the month.
Credit figures were also strong this week, although economists said that was probably more to do with a surge in liquidity rather than a real pickup in demand for loans from consumers and businesses.
Taken together, the data suggests the recovery path isn’t certain and policymakers will need to stay on guard to meet their economic goals this year, including a growth target of around 5%. China’s central bank governor Yi Gang said this week gross domestic product is expected to reach the goal rate, pointing to “positive changes” in the property market as a sign of recovery.
GDP figures next week and a likely meeting of the Communist Party’s Politburo later in April will provide crucial clues on the way forward.
For now, the conflicting data have created diverging expectations on the path for monetary and fiscal stimulus. Some economists, like Nomura Holdings Inc.’s Lu Ting, say recent data suggest growth is losing momentum and gives Beijing reason to take more action. Others, like Societe Generale SA’s Wei Yao and Standard Chartered Plc’s Ding Shuang, argue the economy is rebounding, so more support isn’t needed.
“The economy is in the process of recovery and it would be wrong timing to add stimulus now,” said Ding. “I’d stick to my long-time view that there is no need to ramp up stimulus.”
Traders are taking the opposite view, though, piling into government bonds on bets more monetary easing may be on the way. The nation’s 10-year sovereign bond yield tested a six-month low of 2.81% on Wednesday following subdued inflation data. The yield rose for the first time in five session on Thursday after the unexpectedly strong export figures.
The rebound in consumer and business sentiment will be key to China’s recovery this year. While the jump in credit in March showed companies and residents were more willing to borrow, there were also signs of caution as they boosted savings as well.
“The credit unleashed and the huge increase in money supply were not all used in the production or consumption of goods,” Ming Ming of Citic Securities Co. wrote in a Wednesday report. Consumers’ willingness to expand their balance sheets “has remained limited” due to the lingering impact of Covid-induced declines in employment and income, he said.
There are positive signs in the property market, which appears to be recovering after a historic slump in housing sales for more than a year. New home sales by major Chinese developers rose for a second straight month in March, while a proxy for mortgage loans improved.
However, Nomura’s Lu has cautioned against being too optimistic. He said the rebound could be short-lived since pent-up demand for new homes subsided markedly in early April, mainly led by low-tier cities. Weak demand for loans, especially mortgages, and rising savings have also squeezed profits at banks, prompting some smaller ones to cut their deposit rates recently, he said.
The benefits of the rebound in home sales also don’t seem to have reached upstream industries yet, likely reflecting low confidence and the limited capacity that developers have to expand investment. China is set to release this month a plan asking its steelmakers to keep this year’s output from exceeding 2022 levels, as tepid demand has forced mills to lower prices of the material, Bloomberg reported.
“After adjusting for base effects, we see an increasing number of signs pointing to weakening post-Covid recovery momentum, especially in the property sector,” Lu wrote in report. “We expect Beijing to step up policy support in coming months.”
There’s very little inflation pressure as well, pointing to a subdued economy. Even though consumer inflation is expected to tick up in coming months and producer prices will emerge from deflation, the figures are forecast to be fairly low for the rest of the year.
“This is not the right sign for a full economic recovery,” ING Groep NV’s Iris Pang wrote in a note after the inflation data this week. “The government needs to add more stimulus to the economy.” Some options include more infrastructure investment, consumption incentives like subsidies for electric cars, and interest rate cuts.
(Updates with more detail in the 5th and 14th paragraphs.)
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