There has been a deluge of data out of China this week, most of which has come in below expectations, increasing the likelihood that Beijing will ease policy further to support the economy. The data paints a particularly grim picture of domestic demand in China, despite recent attempts from policy makers to support growth.
Consumer prices in China grew at their slowest pace since January and producer prices fell year-on-year for the 39 consecutive month. China’s CPI jumped 1.2% y/y, missing an expected 1.3% increase, well below the government’s 3% target and even slower than the prior month’s 1.5% y/y jump. Meanwhile, producer prices fell 4.6% y/y (expected -4.5%) on excess supply – China’s softening housing market has created excess supply in building materials – and falling energy prices.
Earlier in the week China released its trade numbers for May which showed the third largest surplus on record at $59.5bn, underpinned by a huge fall in imports. Imports fell a staggering 17.6% y/y last month, representing the seventh consecutive month of waning imports. Exports also fell last month, dropping 2.5%, although this was less than expected.
The soft import and inflation data underscores a lack of activity at the ground level in China, and without further stimulus it’s hard to see how the strength of domestic demand will improve.
The People’s Bank of China (PBoC) has been actively attempting to boost economic growth through numerous cuts to interest rates and a reduction in the amount of cash that banks are required to hold in reserve. The latest round of easing came earlier this month in the form of a reduction in one-year lending and deposit rates by 0.25% each to 5.1% and 2.25% respectively. This is third time the central bank has cut interest rates since November 2014 when the benchmark one-year rate was 6%.
However, the aforementioned easing has clearly yet to find its way into the real economy, as evidenced by China’s softer than expected inflation and imports numbers. In fact, we expect the bank will have to continue to loosen policy in coming months and quarters to support the domestic economy, and it may require further support from the fiscal side of the equation as well.
As we outlined in our China roundup for May (see: a wild ride for Chinese equities), Chinese equities have been reacting positively to softer Chinese economic data lately, largely because the market expects Beijing to looser policy further to support its growth and inflation outlooks. This time around there has only been a slight positive reaction from equity markets to this latest bout of soft economic data - the Shanghai Composite is holding around its opening levels at the time of writing, but today’s numbers may be helping the Index to overcome looses in other parts of Asia that are suffering due to weak investor sentiment (the exception is the ASX200 which is benefiting from bargain hunting in the banking sector). Big moves in the Shanghai Composite lately are likely making investors fairly nervous and may be keeping some participants on the sidelines for the time being.