China’s April data is very much skewed negatively for the economy. With GDP growth slowing down coupled with slowing Industrial Production and Retail Sales growth in the nation, the new quarter doesn’t seem encouraging to the investors. However, there were some positive data outcomes with respect to the slowing CPI and expanding Manufacturing PMI numbers. The slowing CPI numbers and falling global crude oil prices is giving some room for the policy makers to loosen some stance on the monetary side. The PMI trend over the past few months suggests that the risk of an immediate economic hard landing is disappearing, and the underlying momentum of the manufacturing sector has improved. The discrepancy seen in the total Industrial Output and manufacturing PMI seems nothing more than just the base effect.
Also, April trade balance figures from China also stands firm. The country reported positive trade balance for the month beating the consensus at reach above $18 billion for the month. Though the y-o-y export growth seems to slow down, the total export value stands firm at $163.30 bn.
The latest GDP growth rate of China reveals that the Double digit growth in the world’s second largest economy is officially over. China this month reported that gross domestic product (GDP) growth slowed to 8.1 percent a year in the first quarter of 2012, down from 8.9 percent in the previous quarter. On a q-o-q basis too, the economy has slowed down to 1.8 percent from above 2 percent growth rate in the previous quarters.
Much of the slowdown in China’s GDP stemmed from a drop in demand for its exports in Q1 in key markets including the US and Europe.
Apart from the drop in demand in Q1 of the calendar year, the real issue has been its housing sector. Residential housing investment represents around 15 percent of overall investment in China. The Chinese leadership’s efforts in bringing down housing prices and curbing speculation have worked. For the first quarter of the year, new housing starts were down 5.2 percent year over year, while sales were down 15.5 percent.
However, the main reason for the slowdown in housing has been restrictions imposed by the government, not lack of demand. Thus, any relaxation by the authorities of the restrictions so imposed is likely to boost investment in housing and construction sector. But, the probability of this event seems very low in immediate term.
Easing inflation potentially gives Beijing more scope to loosen policy to help the economy rebound from a first-quarter slowdown in growth. Also, we easing global crude oil prices and easing food inflation in China, we feel a further drag in the CPI numbers ahead. We believe that there is a high probability that China will cut its RRR and move towards a monetary loosening stance to support the low growth rate.
Looking at the above parameters the Chinese economy needs some easing in terms of monetary stance by its officials. Be it with relaxing the reverse requirement rates or controls over the housing sector, only such moves can bring back confidence of investors in the economy.
This latest set of data is comforting to the policy makers. On Sunday the PBOC announced the first round of cuts of reserve requirements. The Chinese central bank will cut the reserve requirement ratio (RRR) a few more times this year to manage liquidity and to support growth.
Nevertheless, a strong recovery is still not seen in months ahead, as the Chinese economy will continue to be haunted by both external and internal risks. The biggest external risk comes from Europe’s unresolved debt crisis; while the major internal risk would be a slump in the property market amid stringent government measures.