China: Investment slides to a 15-year low

Chinese economic data

• Chinese retail sales rose at a 10.0 per cent annual rate in April – the slowest growth rate in nine years. The result was below forecasts (+10.5 per cent).
• Production: Industrial production rose at a 5.9 per cent annual rate in April, below the forecast average (6.0 per cent).
• Investment: Urban investment rose by 12.5 per cent in the four months to April compared with a year ago – a near 15 year low (forecast 13.5 per cent).

What does it all mean?

• The latest Chinese data was mildly weaker than expected and continued to highlight the broad-based slowdown. However the result pre-dates the fresh round of stimulus. Last Sunday Chinese authorities dropped the one-year lending and deposit rates by 0.25 per cent to 5.10 per cent and 2.25 per cent respectively. The additional stimulus is unlikely to result in a substantial turnaround in activity levels. While it will provide incremental relief to some sectors further stimulus is likely to be required.
• Importantly the lack of any significant price pressures coupled with sluggish growth will allow policymakers to add further stimulus in coming months. Interestingly Chinese policymakers are focusing on significant reform in the northeast (mining and heavy industry) with a mandate to fast track infrastructure projects.
• China just like Australia is in a process of rebalancing its economy, and as we have seen in Australia, the rebalancing is not without its challenges. In China, retail sales may be growing by around 10 per cent a year, but ecommerce is growing at around 40 per cent a year. Similar strength can be seen across the service and logistics sectors. However the real issue for China lies with rebalancing from an industrialising economy to a domestic consumption driven economy – and at present this is resulting in significant spare capacity in manufacturing and heavy industry.
• It is important to realise that the Chinese economy will grow at a slower pace in coming years as the economy gets bigger and matures. That is a given. All economies have followed that path as they have industrialised. The important point is that the composition of growth becomes more balanced over time with household spending being a bigger driver as the benefits of industrialisation are spread across the country.
• It shouldn’t be forgotten that the world’s second largest economy of 1.3 billion people is still growing at 7 per cent each year – an impressive achievement. And as the Chinese Premier said economic development had entered the “new normal”.
• The Reserve Bank would be hoping for a stronger Chinese economy over the coming year. But at present the Chinese growth story would be looked at as being ‘ok’. CommSec expects the Reserve Bank to remain on the interest rate sidelines over the next few months.

What do the figures show?

Chinese economic data

• Industrial production rose at a 5.9 per cent annual rate in April, below the forecast average (6.0 per cent).
• Production of pharmaceutical goods grew at an 11.4 per cent annual pace in April with computer communication and other electronic equipment manufacturing up 10.2 per cent and steel products up 3.4 per cent.
• Crude steel production fell by 0.7 per cent in April compared with a year ago.
• Retail sales rose at a 10.0 per cent annual rate in April – the slowest rate in nine years. The result was below forecasts (+10.5 per cent) and down from the 10.2 per cent annual rate in March.
• In real terms, spending was up 9.9 per cent in April.
• Sales of telecom equipment rose at a 34.9 per cent annual rate in April with building materials up 18.7 per cent, furniture up 16.4 per cent and home appliances up 9.5 per cent.
• Urban investment rose by 12.0 per cent in the four months to April compared with a year ago. The result was below forecasts of a 13.5 per cent increase and below the 13.5 per cent growth recorded for the in the first three months of 2015.

What is the importance of the economic data?

• China’s National Bureau of Statistics releases its monthly economic statistics around mid-month. Quarterly GDP data is released around the 16th of January, April, July and October. China’s Customs Office releases trade data, and the People’s Bank of China releases financial statistics, around the 10^th of each month. China is Australia’s largest trading partner and changes in the Chinese economic have major implications for the Aussie economy.

What are the implications for interest rates and investors?

• China is Australia’s major trading power and the biggest contributor to growth in the global economy, so the latest results have ramifications for Australia’s export growth, national income and even the Australian dollar.
• There are clear signs that the Chinese economy is seeing slower growth rates across an array of sectors. But importantly inflation remains contained and asset bubbles are not a significant threat. The key for Chinese authorities is to ensure that growth remains robust enough to create employment. At present the jobs growth in the fast expanding services sector is being offset by job losses in manufacturing
• The Reserve Bank will maintain an implicit easing bias. Although CommSec does not expect the Reserve Bank to be cutting interest rates in coming months.