Goldman Sachs On China's Economic Stagnation-Cum-Inflation

What happened:

April industrial production growth slowed significantly;

April industrial production (IP) growth fell to 13.4% yoy (our forecast: 15.0% yoy, market consensus: 14.6% yoy), down from 14.8% yoy in March. Month-on-month (mom) growth fell to -5.2% mom s.a. ann. in April, down from 20.2% mom s.a. ann. in March. However, the National Bureau of Statistic’s (NBS) fficial estimate of mom IP fell much less from 1.15% non-annualized to 0.93% ann. (or 14.7% and 11.7% annualized).

…and so did retail sales growth

Nominal retail sales growth fell to 17.1% yoy in April (our forecast: 17.3% yoy, consensus forecast: 17.5% yoy), down from 17.4% yoy in March. Passenger car sales growth was a main driver of the slowdown which slowed to 2.5% from 6.5% in March. As car sales typically accounts for about 10% of total retail sales, retail sales excluding cars probably held up in terms of its yoy growth rate.

But FAI yoy growth rebounded; Asia-MAP score: 2 (1, 2)

January-April fixed asset investment (FAI) growth rose to 25.4% yoy (our forecast: 24.9% yoy, consensus forecast: 24.9% yoy), up from 25.0% yoy in the January-March period. The implied growth in April alone is 26.1% yoy, up from 25.1% yoy in March. The rise in yoy FAI could be because of base effects as investment growth started to fall significantly in April 2010 amid policy tightening. Our estimated sequential FAI moderated slightly though the NBS’ official estimate showed a rebound. Given FAI data is subject to significantly more data problems than other official data such as IP, we believe it is not possible to make a firm judgment on its sequential growth momentum.

CPI yoy came in slightly above expectations but CPI and PPI inflation moderated on both yoy and sequential terms

April CPI inflation fell to 5.3% yoy (our forecast: 5.1% yoy, consensus forecast: 5.2% yoy), down from 5.4% yoy in March. Month-on-month growth fell to 3.2% mom s.a. ann. in April, down from 6.4% mom s.a. ann. in March. Food price inflation fell to 11.5% yoy, down from 11.7% yoy in March. Sequential food price inflation fell to 6.5% mom s.a. ann. in April, down from 9.2% mom s.a. ann.  in March. Non-food price inflation remained flat at 2.7% yoy in April but its sequential growth fell to 2.2% mom s.a. ann., down from 5.0% mom s.a. ann. in March.

Meanwhile, PPI inflation fell to 6.8% yoy in April (our forecast: 7.1% yoy, consensus forecast: 7.0% yoy), down from 7.3% yoy in March. Its sequential growth softened to 0.1% mom s.a. ann., down from 4.8% mom s.a. ann. in March.

Monetary conditions tightened significantly

Commercial banks extended Rmb739.6 billion in loans in April (our forecast: Rmb720 billion, market consensus: Rmb700 billion), up from Rmb679.4 billion in March 2011 but lower than the Rmb774 billion in April 2010. Outstanding CNY loan growth fell to 17.5% yoy in April (our forecast: 17.5% yoy, market consensus: 17.4% yoy) from 17.9% yoy in March. The mom; s.a. ann. growth remained low at 10.6%, largely unchanged from 10.4% in March.

M2 growth fell much more visibly to 15.3% yoy (our forecast: 16.0% yoy, market consensus: 16.6% yoy) from 16.6% yoy in March. The mom; s.a. ann. growth fell to 3.6%, down from 36.3% in March.


Activity growth was undoubtedly weak though there are some uncertainties in terms of how weak it is: We estimate sequential mom s.a. ann. IP growth was a mere 6% in April 2010, in light of this low base, the fall in its yoy growth by more than 1 percentage point suggests its sequential growth in April 2011 was significantly lower than 6% mom s.a. ann. and likely negative. However, the NBS’ official estimate indicated April mom growth was still 11%-12% annualized. Given the NBS has not released historical data for sequential IP growth and very limited information in terms of its seasonal adjustment program it is difficult to  know the reason for this large difference. One possibility is the NBS chose the smoothed seasonally-adjusted series which only reflect trend and cycle (TC in seasonal adjustment options) but not “irregularities”. If so, the mom would tend to under-state the latest changes (we do use this option but only for FAI data because its data is simply too noisy but we believe the quality of IP data is mostly good enough to use normal adjustment process which includes “irregularities” which often reflects the latest changes at the margin). The NBS has only released mom for the past three months and hence we are not able to prove or disprove this suspicion at the moment. Besides, there are additional uncertainties because of the adjustment to the statistical standard at the start of 2011 (previously all industrial companies with annual sales of Rmb5 million had to report IP data. This level has been raised to Rmb20 million) and the NBS’ official estimate suggests in 2010 the new standard tends to report a higher growth rate and hence the growth rate has to be adjusted when calculating sequential growth but by how much it should adjusted is something unclear because the gap between the two series is not necessarily stable over time. Having said that, judging from data ranging from PMI (both the official and HSBC) and electricity production (growth fell from 14.8% in March to 11.7% in April), industrial growth undoubtedly had a meaningful softening.

The moderation in M2 and power shortages were the likely drivers of the slowdown: The M2 slowdown was in turn contributed by 1) a moderate credit tightening (the amount of newly increased loans was higher than it was in March but considering the seasonality, it was not strong); 2) a moderate fiscal tightening (fiscal deposits increased by Rmb410 billion, Rmb66 billion more than the Rmb344 billion increase in April 2010. Since these deposits are excluded from M2, the more they increase, the lower M2 tends to be); 3) a possible slowdown in FX inflows (though data on FX positions still has not been released so we cannot be sure about this); and 4) possible upside distortions to March data because of various end-of-the-quarter examinations at commercial banks (though the trajectory of M2 growth over the past several months has been closely correlated with our best estimates of the changes in activity growth which suggests M2 data is largely reliable as a gauge of monetary conditions). In addition, there have been widespread power shortages in the country which put a cap on the production of heavy industrial products which is reflected in the larger fall in heavy IP relative to light IP. The power shortages is contributed by a number of factors including the lack of rainfall which limited hydro-electricity production and the strong underlying demand for electricity, though probably the lack of incentives to generate electricity to minimize losses as a result of high coal prices has capped electricity prices.

CPI came in slightly above our and market consensus forecasts, but it nevertheless represented a sequential moderation to around 3% mom ann. from around 7% in March. Encouragingly CPI: non-food and CPI: Housing in particular has shown consistent sequential moderation. The main reason for the upside surprise is downstream food and especially vegetable prices did not fall quite as much as the high frequency food price indices compiled with Ministry of Agriculture and Ministry of Commerce data suggested.

From Goldman Sachs


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