Driving the Day
1.Deceptively good econ data for March and Q1
The stats bureau released economic data for March and Q1on Wednesday.
Pretty much every print beat expectations – which we find suspicious.
Listen to us closely:We aren’t saying authorities cooked the monthly and quarterly books.We are saying this growth print does not look sustainable (see next two entries).
We’ll explain. But first, the details:
- Q1 real GDP growth came in at 6.4% – in line with Q4 GDP growth and beating expectations of 6.3%
- Real Q1 growth was1.4% on a q/q seasonally adjusted basis – in line with expectations, and down a touch from 1.5% in Q4.
- March industrial production was through the roof at 8.5% y/y – up from 5.3% in Jan-Feb, crushing expectations of 5.9%, and marking the highest print since July 2014 (at least when ignoring wild Chinese New Year fluctuations).
- Monthly retail sales came in at 8.7% y/y – up from 8.2% in Jan-Feb, beating expectations of 8.4%, and marking the highest growth rate in six months.
- Monthly investment numbers also improved, growing at 6.5% y/y– up from 6.1% in Jan-Feb and matching expectations.
Interestingly, the market reaction was pretty blasé for such a decidedly positive data print.
Onshore stocks were down in the morning, before recovering in the afternoon. And analysts seemed to be talking down the numbers.
NBS: 一季度国民经济开局平稳 积极因素逐渐增多
Driving the Day, Cont’d
2.Downward pressures persist
Despite the positive economic data,there is still a distinctsense of unease toward China’s economy.
Even those folks who believe this is the beginning of an economicstabilization have been cautioning that any improvement in China will be modest.
And some analysts are cautioning that such positive data will reduce the government’s willingness to push through economic support measures.
The stats bureau spokesman himself was quite cautious, saying(FT):
- “We should also be aware that …the task of reform and development is arduous and downward economic pressures still persist.”
That’s particularly evident for the industrial economy, which saw a big – but fleeting – jump.
- On a m/m basis, industrial production sky-rocketed up to 1% growth – from 0.46% in Jan-Fab, and a0.49% average for all of 2018.
- That marked the highest print since August 2013.
Even the most bullishanalysts won’t argue that such a level of industrial momentum can be maintained.
Get smart: While the m/m industrial data is seasonally adjusted, there was still some positive giveback from a weak February, which willreversein April.
FT: China GDP grows faster than expected in first quarter
Driving the Day, Cont’d
3.Under the data hood
Digging further into the data a bit, there are several factors that lead us to believe the solid improvement in March is unsustainable.
The industrial data speaks for itself (see previous entry), but improved investment also looks shaky.
The uptick in the headline investment number was driven by improved property and infrastructure spending.
- On the former, house prices are just now starting to accelerate, and from what we see, developers are not looking to ramp up new spending on an ongoing basis.
- When it comes infrastructure spending – getting 4.4% y/y average growth in Q1, down from 5% growth in Q4, required RMB 1.4 trillion of local government bond issuance. That pace of issuance won’t be sustained.
- In addition, manufacturing investment – remember all those efforts to buoy the private sector?! – continues to struggle, growing at just 3.7% y/y, down from 5.9% in Jan-Feb.
Finally – we come to nominal growth numbers. While Q1 looked steady in terms of real GDP growth, the slowdown for the nominal economy was much more evident:
- Q1 nominal growth came in at 7.8% y/y – down from 9.1% in Q4.
In our view, the nominal print is more indicative of the current growth path – with corporate profits still compressing on weak upstream price growth.
The bottom line:Overall this a was very good data print for China, but it’s unsustainable into Q2.
4. Central bank to upgradecredit reporting system
The 21st Century Business Herald reports that the central bank (PBoC) is looking to upgrade its credit reporting system for individuals and companies, as early as next month.
Some context: A dozen of financial institutions have been testing the system for the past six months.
More context: The financial system currently operates on an outdated credit reporting system built in 2006.
In terms of hardware, the upgrade is meant to enhance the system’s technological capabilitiesand improve security protection mechanisms.
The system is also meant to pull more types of information from governmental and financial institutionsto generate a more comprehensive credit profile.
The types of new information that the system will track include:
- Arrears for public utility fees
- Penalties from and/or missedpayments to government agencies
- Responsibility for other individuals’ or organizations’ debts
Get smart: Despite the improvement, the new reporting system will still miss one huge element of the credit profile – online transactions.
Get smarter: The inability of regulators – or banks – to properly assess credit risk is one of the structural factors impeding support for the private sector.
21st Century Biz: 央行即将上线二代征信：明确共同还款人、循环贷、分期接入标准
5.Xi Jinping promotes poverty alleviation
On Monday, Xi Jinping headed down to Chongqing to see how things are going.
He wentto the poor village of Huaxi in Shizhu Tujia Autonomous County to check in on poverty alleviation efforts.
Surprise, surprise – according to official media, things are going GREAT!
Xi was happy (Xinhua):
- “Your families are not afraid of starving and not afraid of lack of clothes…this I have seen directly.”
- “Guaranteeing medical care and secure housing has also been done quite well.”
- “When the Party’s policies are good for the common people, they are truly good.”
Our take: State media is a bit over the top. But the anti-poverty campaign really has mobilized a lot of resources and done a lot of good. Xi deserves some credit.
6.Han Zheng tells officials to listen to businesses
Executive Vice Premier Han Zheng has also been on the road, traveling to Shaanxi for an inspection tour from Sunday to Tuesday.
Han’s focus: Making sure that the government’s pro-business agenda is being implemented.
Han told officials that they need to make sure they are listening to companies (Xinhua):
- “Authorities should listen to the suggestions and demands by companies to tackleissues in reforms, and gauge the effectiveness of the reforms based on the evaluation by these market entities.”
Han then put his money where his mouthis and paid a visit to three area firms to find out how they see the current operating environment.
The lucky firms:
- Pharmaceutical company Shaanxi Hanwang
- Electric vehicle manufacturer BYD
- Semiconductor maker Samsung Semiconductors
Han also took a trip to the tax bureau in Xi’an’s Qujiang New Area to make sure that local officials were properly implementing the new tax cuts.
The message: The government is serious about creating a more favorable business environment.
Our thought: The government has said it wants to help small businesses – BYD and Samsung are anything but.
Xinhua: Chinese vice premier calls for advances in reform and development
7.Government promotes elderly care industry
On Tuesday, the State Council General Office published a document to promote development of the elderly care industry.
Some context: This is the third time that the State Council has issued a document to promoteelderly care services since 2013.
Yesterday’s regs represent a step up from previous efforts. Theyattemptto address specific regulatory hurdles that elderly care service providers face. They also set deadlines for resolving some of those challenges.
Foreign investors take notice: The document is explicit that foreign investment will be treated equally in the sector.
The elderly care industry will also get support from local governments (Gov.cn):
- “City governments should provide a package of policy support, including with respect to planning, land, financing, fiscal, combining of medical and pension plans, human resources, and others.”
But the government also wants to make sure that companies can’t take advantage of the system:
- “Enterprises that enjoy the support of government policies, need to come up with a list of responsibilities and…price their service reasonably.”
Get smart: China’s population is aging FAST. And the government does not have the resources to deal with it. That means policymakersare open to engaging private companies – including foreign companies – that can provide solutions in the critically important elderly care industry.
Related: Check out our UB post on how Chinese e-commerce companies are tapping into the senior market.