China recovery likely picked up with outlook buoyed by stimulus

CHINA’S economy likely continued to show signs of improvement in April, buoying the outlook for recovery as policymakers ramped up support.

Data due on Friday (May 17) will offer a glimpse of whether the world’s second-biggest economy was able to sustain the recovery momentum in the first quarter as it seeks to achieve an ambitious full-year growth of around 5 per cent.

Industrial production probably remained a key growth driver, with robust exports and infrastructure investment driving demand. Consumption could still be a drag as an ongoing property slump has weighed on sentiment.

There’s been a drumbeat of pro-growth signals from China in recent weeks. Top leaders hinted at measures to reduce property inventory – with Beijing mulling a plan for local governments to buy millions of unsold homes. China will kick off the sale of its one trillion yuan (S$186 billion) ultra-long special sovereign bonds on Friday, a move to raise funds to support the economy. This also spurred expectations of further monetary easing to help banks buy up the notes.

“China’s recovery is gradually bedding down and broadening out, supported by targeted fiscal stimulus,” Pantheon Macroeconomics economists including Duncan Wrigley wrote in a note this week.

Here’s what to expect when the National Bureau of Statistics publishes the data on 10 am on Friday:

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Industrial production

Industrial output is set to rise 5.5 per cent in April from a year earlier, according to a median forecast by economists in a Bloomberg survey. That’s an acceleration from the 4.5 per cent increase in March.

Both the official and private surveys of manufacturers pointed to an expansion in factory activity last month. Data from the statistics bureau showed a sub-gauge of output climbing to the strongest level in more than a year. A measure of new export orders posted its first back-to-back expansion since March 2023.

But China’s strong industrial output is a source of tensions with the West. The US and Europe have criticised Beijing for flooding the global market with cheap goods, particularly in new energy sectors. Amid those concerns and as producer prices remained stuck in deflation, China urged lithium battery makers not to build plants that are “simply aimed at expanding production capacity”.

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Consumption

Retail sales probably climbed 3.7 per cent last month, picking up from a 3.1 per cent gain in March. Still, that’s a weaker pace than what China was used to before the pandemic. Domestic demand remains weak, as seen in inflation data that’s only marginally above zero, as well as a surprise contraction in credit numbers.

Vehicle sales, which make up about 10 per cent of overall retail sales, also reflect sluggish demand. The China Passenger Car Association said sales via retail networks fell 5.8 per cent in April from a year ago, as consumers waited for more discounts amid a price war among automakers.

To spur demand, the government rolled out a programme to encourage households and businesses to upgrade their old machinery and home goods. Cars are at the centre of this plan, with the central government providing as much as 10,000 yuan in one-time subsidies for individuals replacing their vehicles.

Total fiscal funding for the car trade-ins could reach 80 billion yuan, exceeding an earlier anticipated cap of no more than 50 billion yuan, and could force the government to cut spending elsewhere, Morgan Stanley economists including Robin Xing said this week.

The programme, along with other recent policies, “offer some visibility on relatively stable economic growth for the rest of this year”, the economists said. However the measures have not been forceful enough to reflate the economy, they added.

Investment

Fixed-asset investment likely expanded 4.6 per cent in the January to April period, slightly up from a 4.5 per cent gain in the first quarter.

But property investment could have tumbled 9.7 per cent in the first four months, worse than the drop of 9.5 per cent in January to March. The country’s biggest developers have been under pressure after a persistent slump in home sales, leaving the companies with little confidence or means to expand.

More cities are scrapping kerbs on residential property purchases to stimulate demand, with Hangzhou – the home base of e-commerce giant Alibaba Group Holding – among the latest. The government in April also banned new land sales to build homes in cities with severe inventory overhang.

Infrastructure investment was likely resilient as funds raised from last year’s additional one trillion yuan of sovereign bond issuance is still being spent on water conservation, transport, disaster relief and other projects.

More stimulus

China’s recovery is set to continue, helped by a spate of pro-growth policies announced in recent weeks. The issuance of this year’s one trillion yuan in special sovereign notes will go on until mid-November, while local governments can still tap more than 70 per cent of the annual 4.6 trillion yuan new bond quotas.

This could prompt the government to ease monetary policy to ensure ample liquidity for the bond sales and prevent disruptions to the financial system.

The central bank “may provide some liquidity support during the bond issuance, and even indirectly purchase some of them through its balance sheet expansion”, Goldman Sachs economists including Lisheng Wang wrote in a note on Monday.

They predict the People’s Bank of China will cut the reserve requirement ratio twice by 25 basis points each in the current and final quarters, as well as lower the policy rate by 10 basis points in the July to September period. BLOOMBERG