China’s recovery was mixed in April, with industrial production and investment bolstered by strong exports and a hot real estate market, while retail sales missed expectations.
Industrial production rose 9.8% in April from the previous year compared to the median estimate of a 10% increase. Retail sales grew 17.7% over the period, much slower than the expected 25% increase. Investments in fixed assets rose 19.9% in the first four months of the year, in line with forecasts. The unemployment rate was lower at 5.1%.
The data highlights that while China remains on track to meet its economic growth target of over 6% for the year, making it a global driver of commodity demand, the pace of expansion has may have already peaked as policymakers seek to cut stimulus and consumers remain cautious about spending.
“Economic growth probably peaked in the first quarter” on a quarterly basis, said Zhiwei Zhang, chief economist at Pinpoint Asset Management. “We expect growth to gradually slow down in the coming months.” An increase in new cases of Covid in China will likely warn policymakers as tightening monetary policy is likely on hold for now, he said.
The data was heavily impacted by base effects from April 2020, when China’s industrial economy reopened when the coronavirus was brought under control. On a two-year average basis, which corrects for this bias, industrial production growth has remained constant from the first quarter at 6.8%, while investment in fixed assets accelerated slightly to 3.9% against 2.9%.
However, retail sales growth moderated to 4.3% in April on a two-year average basis, from 6.3% in March, as consumption of food and beverage services both weakened, which weakened expectations that consumer demand was beginning to replace investment as the engine of growth.
Chinese households have not yet “returned to their usual pace” due to weak income growth, said Frederic Neumann, head of the Asian economy at HSBC Holdings Plc. “If households fail to increase their spending in the coming months, the authorities may be forced to relax the reins of liquidity and investment spending to avoid a more marked slowdown in growth,” he said. he adds.
While the Chinese economy stabilized on a more solid footing in April, it still faces the pandemic and an uneven recovery globally, as well as a fragile base of recovery in the country, a the NBS said in a statement. Separate NBS report suggests housing market remains strong, with home prices rising at the fastest pace in eight months in April.
The country’s top leaders recently called the recovery “unbalanced and unstable”, promising further efforts to lead a rebound in domestic demand. Sheng Laiyun, vice director of the National Bureau of Statistics, said earlier this month that there was still a gap between real and potential growth, suggesting that the recovery still has some way to go.
What Bloomberg Economics Says …
The recovery is expected to continue into at least the third quarter, but domestic weakness remains a drag on the economy as a whole. External demand is expected to remain supportive as rival exporters face disruptions from the resurgence of the virus. Domestically, China’s recovery is broadening, with demand and small private businesses on the mend. Even so, the recovery in consumption is still not strong and remains vulnerable to another setback caused by sporadic viral outbreaks.
Chang Shu, Chief Economist for Asia
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The Chinese stock market benchmark CSI 300 extended its gains to 1.8%, with consumer discretionary and information technology sub-indicators leading the rally.
Industrial production has remained robust thanks to a recovery in global demand, with fiscal stimulus and faster vaccine deployments in many locations, helping to maintain export growth. Rising commodity prices have probably been a constraint in some regions, as has reduced production in sectors such as steel and coal in order to reduce pollution.
The authorities are committed to gradually reducing the monetary and fiscal stimulus injected into the economy last year, without drastic policy changes. Recent data show a credit slowdown in April, suggesting that the exit could materialize at a faster rate than expected. Central bank injected medium-term liquidity into the financial system on Monday to match the amount due, a move widely expected by analysts.
In March, the People’s Bank of China told banks to curb loan growth in the coming months and keep it at about the same level as last year. The pace of local government debt sales to finance infrastructure projects also slowed sharply from January to April compared to the same period in previous years, according to Bloomberg calculations.
– With the help of Tom Hancock, Lin Zhu, Yinan Zhao, Yujing Liu and Lianting Tu
(Updates with additional details)
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