Chinese retail sales rose at a 10.1 per cent annual rate in May. The result was in line with forecasts (+10.1 per cent).
Production: Industrial production rose at a 6.1 per cent annual rate in May, above the forecast average (6.0 per cent).
Investment: Urban investment rose by 11.4 per cent in the five months to May compared with a year ago – a 14 year low (forecast 11.9 per cent).
What does it all mean?
The latest Chinese data was mildly better than expected, although the weaker investment data continued to highlight the broad-based slowdown that has taken place over the past year. It is important to put into context the recent slowdown. 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 – a key driver of fixed asset investment holding at 14-year lows. At the other end of the spectrum the high tech industrial sector grew by 9.3 per cent.
Importantly the targeted stimulus that continues to be delivered by Chinese authorities should cushion the slowdown, and ensure that sustainable growth outcomes are achieved. 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 heavy industry with a mandate to fast track infrastructure projects – a theme that was mirrored by the Reserve Bank Governor Glenn Stevens in a speech yesterday discussing the Australian economy.
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.
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 6.1 per cent annual rate in May, above the forecast average (6.0 per cent).
Production of consumer goods grew at a 6.7 per cent annual pace in May with pharmaceutical manufacturing up 8.7 per cent, computer communication and other electronic equipment manufacturing up 12.5 per cent.
Crude steel production fell by 1.6 per cent in May compared with a year ago.
Retail sales rose at a 10.1 per cent annual rate in May – just shy of the slowest rate in nine years (10 per cent in April). The result was in line with forecasts (+10.1 per cent).
In real terms, spending was up 10.2 per cent in May on a year ago (+9.9 per cent in April).
Sales of telecom equipment rose at a 39.4 per cent annual rate in May with building materials up 19.2 per cent, furniture up 17.3 per cent, clothing & footwear up 12.5 per cent and home appliances up 5.1 per cent.
Urban investment rose by 11.4 per cent in the five months to May compared with a year ago. The result was below forecasts of an 11.9 per cent increase and below the 12.0 per cent growth recorded for the in the first four 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 10th 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 rebound in iron ore prices would provide the Reserve Bank with an added degree of encouragement. CommSec does not expect the Reserve Bank to be cutting interest rates in coming months.
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