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    Weak Chinese data points to ongoing slowdown amid growing debt fears

    Trade figures released at the start of the week on Sunday did little to allay fears about the health of China’s economy as they disappointed once again. Following a surprise 11.5% surge in March, exports in April turned negative again as they declined by 1.8% year-on-year, missing forecasts of a 0.1% drop. Imports also fell short of estimates as they fell at an annual rate of 10.9% in April, far worse than expectations of a 5% drop and down from March’s -5.9% rate.

    The disappointing numbers come on the heels of last week’s weak PMI data, which showed both manufacturing and services activity slowing in April. The data does not bode well for second quarter growth and could point to GDP growth slowing further to below the first quarter’s 6.7% rate.

    China’s stock market reacted negatively to the trade data as it reversed the positive sentiment from the previous month’s upbeat numbers. Shares in China were also hit by rumours that Chinese authorities may start to reign in on the recent surge in credit expansion following growing concerns that the build-up of debt could pose serious financial risks to the economy. Figures to be released tomorrow, are expected to show bank lending to have moderated in April from the surge seen in the first three months of the year.

    The Shanghai SE Composite index managed to close slightly up today after dropping by a combined 4.6% on Friday and Monday, which took the index to a near two-month low.

    Inflation data out today however kept the possibility of further monetary easing open as consumer prices rose less than expected in April. CPI rose at an annual rate of 2.3% last month, below consensus estimates of 2.4% and unchanged from March. But there were some signs that producer prices, which have been stuck in negative territory for over four years, may be turning the corner. PPI improved to -3.4% in April from -4.3% the prior month, beating forecasts of -3.8%.

    The mixed data clouds the outlook for future rate cuts by the People’s Bank of China, which in recent months has opted to increase liquidity via open-market operations rather than cut its main benchmark rate. The PBOC last cut its one-year deposit rate back in October 2015 to 4.35% but has kept it steady since as it’s focused on other tools to control money supply.

    However, some analysts think that the recent pick up in CPI and PPI are due to temporary factors, such as food and steel prices, and that the PBOC will ease again in the coming months. With inflation expected to hold below the central bank’s 3% target, the PBOC has room to cut rates further. But given the downside pressure this may create for the yuan, a reduction in the reserve requirement ratio for banks is more likely.

    The yuan was steady against the dollar in onshore trading after today’s data, having bounced back from a dip at the start of Tuesday trading following a weaker midpoint set by the PBOC. The Chinese currency has mostly been tracking the dollar’s moves in recent months and has depreciated by about 1% from the 3½-month high of 6.4470 per dollar it touched at the end of March to around 6.5145 per dollar today.

    Next in focus for China and the yuan are the latest batch of industrial production, retail sales and business investment data out on Saturday.

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