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Data remain weak, but hard landing unlikely
By Tao Dong |
June 12, 2012, Tuesday
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CHINA'S headline Consumer Price Index growth was 3 percent year on year in May, moderated from 3.4 percent in April and undershot market's expectation of a 3.2 percent.
Meanwhile, Producer Price Index inflation decelerated further to -1.4 percent, highlighting the existing weak domestic demand and softened commodity prices.
Industrial production grew 9.6 percent year on year in May, improved from 9.3 percent seen in April, though softer than the 9.8 percent consensus expectation. The improvement seems to have reflected the government's increased selective easing measures.
Fixed asset investments have risen 20.1 percent year on year in the first five months of the year, better than the 20 percent consensus expectation. It appears that the launch of the government's infrastructure projects have helped stabilized FAI growth.
Nominal retail sales growth was 13.8 percent year on year in May, moderated from 14.1 percent in April, but stayed largely unchanged in real terms. Export and import growth surprised on the upside in May, jumping 15.3 percent and 12.8 percent, respectively.
No imminent action
This is a set of weak numbers, reflecting continued weakness in economic activities. We do not anticipate any imminent action from Beijing in response to the data, as the interest rate cut on June 7 was the response.
Still, it looks increasingly likely that inflation may trend down longer and deeper than the market's current expectation. That should create room for further easing actions by the People's Bank of China, which was reluctant to cut interest rates in anticipation of a rebound of inflation towards the end of the year.
We now see two more cuts in the lending rate and one cut in the deposit rate by the end of this year (changed from none in the past), on top of three more cuts in the reserve requirement ratio. We believe the improvement in industrial production and fixed asset investment is marginal and not decisive in view of the two extra working days in May.
Also, these numbers remain way off from the usual strength. The rebound in trade growth was a surprise, but could stem from temporary factors.
There is no question in our mind that industrial activities have remained weak, especially in the private sector. However, the impact of stimulus should start to emerge in the coming months.
So far, the level of economic activities seems pointing to a growth range of about 7-7.5 percent year on year for the second quarter of 2012, or slightly worse if the trade surplus narrows more than what we have expected.
There is an increasing likelihood that China's growth may be below 8 percent for 2012, but it still does not look like a hard landing to us.
Meanwhile, Producer Price Index inflation decelerated further to -1.4 percent, highlighting the existing weak domestic demand and softened commodity prices.
Industrial production grew 9.6 percent year on year in May, improved from 9.3 percent seen in April, though softer than the 9.8 percent consensus expectation. The improvement seems to have reflected the government's increased selective easing measures.
Fixed asset investments have risen 20.1 percent year on year in the first five months of the year, better than the 20 percent consensus expectation. It appears that the launch of the government's infrastructure projects have helped stabilized FAI growth.
Nominal retail sales growth was 13.8 percent year on year in May, moderated from 14.1 percent in April, but stayed largely unchanged in real terms. Export and import growth surprised on the upside in May, jumping 15.3 percent and 12.8 percent, respectively.
No imminent action
This is a set of weak numbers, reflecting continued weakness in economic activities. We do not anticipate any imminent action from Beijing in response to the data, as the interest rate cut on June 7 was the response.
Still, it looks increasingly likely that inflation may trend down longer and deeper than the market's current expectation. That should create room for further easing actions by the People's Bank of China, which was reluctant to cut interest rates in anticipation of a rebound of inflation towards the end of the year.
We now see two more cuts in the lending rate and one cut in the deposit rate by the end of this year (changed from none in the past), on top of three more cuts in the reserve requirement ratio. We believe the improvement in industrial production and fixed asset investment is marginal and not decisive in view of the two extra working days in May.
Also, these numbers remain way off from the usual strength. The rebound in trade growth was a surprise, but could stem from temporary factors.
There is no question in our mind that industrial activities have remained weak, especially in the private sector. However, the impact of stimulus should start to emerge in the coming months.
So far, the level of economic activities seems pointing to a growth range of about 7-7.5 percent year on year for the second quarter of 2012, or slightly worse if the trade surplus narrows more than what we have expected.
There is an increasing likelihood that China's growth may be below 8 percent for 2012, but it still does not look like a hard landing to us.
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