China’s economy on the mend

From

Chinese economic data

  • Retail sales fell at a 7.5 per cent annual rate (consensus: -6 per cent) in April after declining at a 15.8 per cent annual rate in the year to March.
  • Industrial production rose at a 3.9 per cent annual rate in April (consensus: +1.5 per cent) – the first expansion this year – after declining at a 1.1 per cent rate in March.
  • Fixed-asset investment fell at a 10.3 per cent annual rate in April (consensus: -10 per cent) after declining at a 16.1 per cent rate in March.
  • Chinese property investment fell at a 3.3 per cent annual rate over the year to April (consensus: -4.5 per cent) following a 7.7 per cent contraction over the year to March.
  • Unemployment: The unemployment rate (nationwide survey-based jobless rate) rose from 5.9 per cent in March to 6 per cent in April (consensus: 5.8 per cent).

The Chinese data is important for exporters, especially rural producers, consumer goods, mining and energy companies.

What does it all mean?

  • China’s economy is slowly recovering from the virus lockdown which halted factory activity, construction work and forced consumers indoors between January and March. While China is gradually emerging from the economic downturn, April’s economic data was decidedly mixed – dashing investor and economist hopes for a quickening of activity as the economy re-opens.
  • In a positive development, industrial production expanded for the first time this year, fanned by government stimulus. And in a sign that China’s factories are humming again, indicators like electricity generation turned positive in April with coal consumption picking up.
  • That said, retail spending remained weak due to fragile consumer confidence and rising joblessness. Weakness was particularly evident in the restaurants and catering segment with consumers still cautious about secondary virus infections and social distancing measures despite a re-opening of food outlets. But it wasn’t all bad news, key components of consumption lifted sharply, such as spending on beverages and automobiles. And online spending is in vogue, up 8.6 per cent in the four months to April from a year ago.
  • Policymakers were at pains to point out today that China’s economy “hasn’t returned to normal levels.” Statistician Liu Aihua expressed reservations about rising unemployment – suggesting that the uptick in the jobless rate to 6 per cent masks the full extent of labour force displacement and oversupply of workers due to virus shutdowns.
  • Of course, with trade tensions between the US and China escalating in the past week, Liu highlighted that overseas developments remain challenging, despite “pent up demand effects” in the data improvement. In particular, Chinese exports lifted in April due to a backlog of orders during the economic shutdown. But demand is set to weaken with China’s major western export markets confronted with their own deep economic contractions.

What do the figures show?

  • Retail sales fell at a 7.5 per cent annual rate (consensus: -6 per cent) in April after declining at a 15.8 per cent annual rate in the year to March. Over the year to April, spending fell the most at restaurants/catering (down 31.1 per cent); clothing (down 18.5 per cent); petroleum (down 14.1 per cent); and jewellery (down 12.1 per cent). But spending lifted most on food (up 18.2 per cent); beverages (up 12.9 per cent); and communications appliances (up 12.2 per cent).
  • Industrial production rose at a 3.9 per cent annual rate in April (consensus: +1.5 per cent) after declining at a 1.1 per cent rate in March. Over the year to April, production rose the most for specially-used equipment (up 14.3 per cent); telecommunications/computer equipment (up 11.8 per cent); machineries (up 9 per cent); and metal products (up 8.9 per cent). But energy production fell by 0.2 per cent.
  • Fixed-asset investment fell at a 10.3 per cent annual rate in April (consensus: -10 per cent) after declining at a 16.1 per cent rate in March. Over the year to April, investment fell by the most for the private sector (down 13.3 per cent), followed by state-owned enterprises (down 6.9 per cent). By industry, investment in textiles (down 32.5 per cent); railways/ships/others (down 26.2 per cent); general equipment (down 25.1 per cent) fell the most. But investment in utilities rose the most (up by 7.6 per cent); followed by healthcare & social works (up 4 per cent); and education (up 2.9 per cent) rose the most.
  • Chinese property investment fell at a 3.3 per cent annual rate over the year to April (consensus: -4.5 per cent) following a 7.7 per cent contraction over the year to March.
  • The unemployment rate (nationwide survey-based jobless rate) rose from 5.9 per cent in March to 6 per cent in April (consensus: 5.8 per cent).

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 19th 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 economy have major implications for the Aussie economy.

What are the implications for interest rates and investors?

  • Investors and economists that were hoping for a ‘V’-shaped recovery in China will be disappointed. While China’s economy has been kick-started after a huge economic contraction, the recovery seems likely to be gradual. In particular, the services sector remains hampered by weak consumer spending and domestic demand. And the re-intensification of US trade tensions appears to be China’s biggest economic threat in the near term, especially with US President Trump seemingly intent on blaming China for the pandemic outbreak.
  • Of course, Australia’s trade relationship with China is in the headlines at the moment. An escalation of Sino-Aussie tensions is not ideal with travel bans already impacting our tourism and education exports. And after just getting back on their feet after contending with drought and bushfires, Aussie farmers won’t welcome a stoush with our biggest trading partner. The word “diversification” has been mentioned with 38 per cent of exports headed to China, but a policy roadmap is required.
  • Chinese authorities announced the approval of a further 1 trillion yuan ($US141 billion) in special purpose bonds to boost infrastructure spending today. That said, China’s desire to maintain a lid on rising debt levels means that those expecting a huge ‘global financial crisis-style’ fiscal stimulus will be disappointed.
  • Attention will now turn to the National People’s Congress on May 22. Chinese policymakers usually unveil both their economic growth (GDP) targets and the details of their fiscal policy initiatives. Of course, given rising unemployment, strategic and proactive policies targeting job creation will be a key focus, including subsidies for wages and factories.

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