China slowdown tests leaders' resolve
Overseas sales rose 1 per cent from a year earlier, down from 14.7 per cent the previous month, the customs administration said yesterday, after a crackdown on fake trade invoices. Data today showed factory-gate prices fell for a 15th month, inflation was lower than all estimates in a Bloomberg survey and new yuan loans declined.
The data add pressure on President Xi Jinping and Premier Li Keqiang to shore up growth less than three months into their tenure, after first-quarter expansion unexpectedly slowed.
While the figures strengthen the case for easing monetary policy or approving more spending, the leaders' room is limited by rising home prices, financial risks and overcapacity.
"The focus for China's new leadership this year is adjusting the economic structure" instead of achieving a high growth rate, said Zhu Haibin, chief China economist at JPMorgan Chase & Co in Hong Kong. "If economic indicators remain weak throughout the second quarter, the Chinese leadership may accelerate existing reforms and policy support, including on the monetary- and fiscal-policy fronts."
Data due later today on industrial production and retail sales for May and fixed-asset investment for the first five months are forecast to show little change from April's growth rates. Analysts last month trimmed economic-expansion forecasts for the April-June period to a median projection of 7.8 per cent from an 8 per cent pace forecast in April.
Li told provincial leaders yesterday that while growth is still relatively fast and within a reasonable range, "complicated factors" are ahead and must be closely monitored. Xi said at a California summit with US President Barack Obama that "we have full confidence in sustained and healthy long-term economic development" and that risks and challenges are controllable.
May exports rose by the least in 10 months, while imports dropped 0.3 per cent from a year earlier. The median estimates of analysts were for 7.4 per cent export growth and 6.6 per cent import gains.
The $20.4-billion trade surplus compared with forecasts for $20 billion.
"This shows the real state of the Chinese export situation," said Shen Jianguang, chief Asia economist at Mizuho Securities Asia in Hong Kong. The data give a "pretty depressed" picture, with weak external demand and a yuan that has appreciated substantially against a trade-weighted basket of currencies, said Shen, previously of the European Central Bank.
The slowdown in May's trade figures was partly the result of "arbitrage trade" with Hong Kong being curbed, the customs administration said yesterday. Appreciation in the yuan and the worsening trade environment, as well as a domestic slowdown, weak external demand and high business costs, also contributed, the agency said.
New local-currency lending of 667.4 billion yuan ($109 billion) trailed the median estimate of 34 economists and was down from 793.2 billion yuan a year earlier, People's Bank of China data showed. Aggregate financing of 1.19 trillion yuan compared with 1.14 trillion yuan in May 2012, while M2 money supply grew 15.8 per cent from a year earlier.
The PBOC said in a June 7 financial-stability report that overdue loans rose 46 per cent last year, adding to signs of strain in the banking system.
The consumer price index rose 2.1 per cent from a year earlier, the National Bureau of Statistics said, dragged down by slower food inflation. The producer price index fell by a more than estimated 2.9 per cent, the biggest drop since September.
The trade slump adds to concerns that the global recovery is losing momentum. The ECB last week forecast the 17-nation euro area will contract 0.6 per cent this year, more than its March estimate of 0.5 per cent.
Frequently Asked Questions about this Article…
The article says recent Chinese data — weaker trade, lower inflation and reduced new lending — point to softer domestic and global demand. For investors this can mean increased market volatility, pressure on China-exposed stocks (exporters, commodity firms, banks) and a higher chance Beijing may introduce measured policy support if weakness persists.
May exports rose just 1% year‑on‑year (down from 14.7% the prior month) in part due to a crackdown on fake invoices and curbed arbitrage trade with Hong Kong. The article also notes a stronger yuan on a trade‑weighted basis made Chinese goods pricier abroad, which, combined with weak external demand, is weighing on exporters’ sales and margins.
The article says the figures strengthen the case for easing monetary policy or approving more spending, but leaders’ room for stimulus is limited by rising home prices, financial risks and overcapacity. JPMorgan economists note policymakers may accelerate existing reforms and policy support (monetary and fiscal) if indicators stay weak.
Producer prices fell 2.9% — the largest drop since September — while the consumer price index rose 2.1% mainly due to slower food inflation. For investors this signals deflationary pressure at the producer level that can squeeze corporate margins, especially for commodity and manufacturing firms, even as consumer inflation remains subdued.
New local‑currency lending fell to 667.4 billion yuan, down from 793.2 billion a year earlier and below economist estimates. The People’s Bank of China reported overdue loans rose 46% last year, indicating strain in the banking system. Aggregate financing and M2 growth remain sizeable but the lending slowdown raises credit‑quality and growth concerns for bank‑linked investments.
Premier Li Keqiang warned of “complicated factors” ahead and urged close monitoring, while President Xi Jinping expressed confidence in long‑term healthy development. The article highlights leadership focus on adjusting the economic structure rather than chasing high short‑term growth, suggesting policy responses may be targeted and reform‑oriented.
The article warns the trade slump adds to concerns the global recovery is losing momentum; weaker Chinese demand hits exporters and commodity markets. International investors should watch China’s trade and industrial data as well as forecasts from major institutions (the article cites the ECB’s weaker outlook for Europe) because slower Chinese growth can ripple through global earnings and commodity prices.
The article highlights important near‑term data: industrial production and retail sales for May, and fixed‑asset investment for the first five months. Analysts also trimmed Q2 growth forecasts (median to 7.8% from 8%), so these releases will be key to judging whether weakness is persistent and whether policymakers will step up support.
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