China’s economy reveals pockets of weakness ahead of Friday data

BEIJING — As China’s economy enters its second quarter of the year, some indicators point to sluggish growth if things don’t improve, raising expectations for an easing of monetary policy.

The National Bureau of Statistics is due to release data on retail sales, industrial production and fixed capital investment for April on Friday. Analysts polled by Reuters on Tuesday expect a slight increase from March.

The same day, China plans to issue its first ultra-long bond – lasting 30 years – as Beijing launches a previously announced program totaling 1 trillion yuan ($138.25 billion). ) funds for major strategic projects. The Ministry of Finance has not specified what the first tranche will be used for.

“As emissions continue until November, it is likely that part of the revenues spent (and therefore beneficial to the economy) will only appear in the first half of next year,” Louise Loo said on Tuesday, senior economist at Oxford Economics, in a note.

The company expects economic data released this week to show a “slowing of economic dynamics”, confirming its forecast that the central bank will cut rates by the end of June.

The central government’s bond program comes as housing drag persists, while businesses and consumers remain largely cautious about spending.

The People’s Bank of China released new lending data for April over the weekend that showed a sharp decline in demand, with several indicators at their lowest levels in at least two decades.

Goldman Sachs and analysts at other firms were quick to point out that the month-over-month figures were affected by changes in how official data is calculated, as well as a crackdown on loans used for financial purposes instead. as for business expansion.

“Some of this weakness speaks to real sluggish demand in China right now,” Hui Shan, Goldman Sachs’ chief China economist, said in a note on Sunday.

Outstanding Chinese yuan loans rose 9.6% year-on-year in April, the same rate as in March and the lowest since records began in 1978, according to official data accessible via Wind Information.

New bank loans to businesses and government agencies fell sharply in April compared to March, as did new loans to households, according to official data seen via Wind Information.

What worries Clocktower Group analysts is that the 12-month moving average for both categories of new loans has started to trend downward for the first time since the 2008 financial crisis.

“If the public sector fails to support credit growth in a timely manner, a sharp deceleration in growth is likely to occur in the future, as economic agents will be forced to reduce their consumption and investments to cope with their debt obligations,” the company said recently. April.

On a 12-month rolling average basis, the category of new bank loans, including businesses, saw a slight increase in April compared to March, while new loans to households declined during this period, according to CNBC analysis of data accessible via Wind.

The amount of new business lending is still well above what it was in 2019, even though household lending has fallen below that level, the data shows.

A China Beige Book survey in April found that corporate borrowing declined, driven down by services, while the manufacturing sector saw an increase in demand. The overall decline occurred despite more loans being approved and interest rates falling, making borrowing cheaper.

M2, a measure of money supply that includes cash, cash equivalents and some deposits, rose 7.2% in April from last year, its slowest pace on record dating back to 1986, according to official data accessible via Wind Information.

“Going forward, the growth of new CNY and M2 loans may gradually slow down further, as the People’s Bank of China highlighted the weakening relationship between economic growth and credit expansion,” they said. Goldman analysts in a separate report on Sunday, referring to the central bank’s quarterly monetary policy report. released Friday.

“We continue to expect two more RRR cuts and a policy rate cut for the remainder of the year,” they said.

RRR refers to banks’ reserve requirements, or the amount of liquidity they must have on hand. People’s Bank of China Governor Pan Gongsheng told reporters in March that it was possible to further reduce these reserve requirements.

“April credit data is disappointing, but this is mainly due to regulatory changes rather than a sharp deterioration in underlying demand,” Larry Hu, chief China economist at Macquarie, said in a report.

“Policymakers don’t want another credit-fueled recovery. Instead, they are happy to rely on exports and new energy sectors to drive growth, at least for now,” he said. he declared. He expects exports to remain on track to achieve 5% growth this year, while noting that the auto sector has performed well.

Chinese exports have held up despite rising trade tensions. Data released last week showed exports rose year-on-year in April, up 1.5% and in line with expectations, while imports rose much more than expected.

Separate figures released over the weekend showed a slight recovery in consumer prices in April. But the price measurement in factories continued to fall.

However, real estate, which once accounted for at least a quarter of China’s economy, remains a drag, despite a growing number of cities easing purchasing restrictions.

Real estate sales are increasingly moving into the secondary market, meaning developers aren’t profiting much from a market that’s “still looking for a bottom,” S&P Global Ratings said in a report early last week.

S&P analysts expect China’s main residential market to contract 16% this year.

China’s house price index is also due to be released on Friday. Longer term, investors are waiting for a major government meeting scheduled for July to get signals on long-term economic policy.

“Separately, the PBOC suggests it will study policies to help digest existing housing stock and improve the supply of new housing to stabilize the housing market,” Morgan Stanley analysts said.

“We believe this echoes the message from the recent Politburo meeting regarding the real estate market and shows that monetary policy could potentially be used as part of support measures to help China manage its large real estate stock.”

— CNBC’s Michael Bloom contributed to this report.