Growth stabilized - April data preview

The tug-of-war between mini-policy support and a property downturn continued in April. On one hand, infrastructure investment likely helped support overall f ixed assets investment in April with the help of faster fund disbursement and project approvals, domestic orders in the PMI improved slightly and crude steel production gained steam. On the other hand, power generation weakened and property activity possibly stayed weak. Overall, we expect the upcoming April data to show growth momentum stabilizing with the help of a "mini-stimulus" and a modestly improving export outlook.

Underlying trade growth has likely improved somewhat, although headline numbers continue to be distorted by last year's over-invoicing. Business sentiment in US and Europe has resumed its ascendancy, although the export orders sub-index in PMIs edged down in April. We believe underlying export growth edged up to about 6.5 percent year on year in April, although the headline number will likely show a mostly flat picture. Meanwhile, as the industrial inventory level is still running high against new orders and financing-related arbitrage purchases appear to be ebbing, imports possibly declined another 4 percent year on year in April.

Fixed investment growth probably edged up with the help of "mini-stimulus". Infrastructure investment likely maintained its strength into April, supported by the government's push on key investment and construction projects and quicker fiscal spending. This possibly more than offset a soft manufacturing investment and a further slide in real estate investment growth in April. As a result, we think f ixed assets investment growth likely edged up from 17.4 percent year on year in March to 18 percent year on year in April, bringing year-to-date growth to 17.7 percent year on year.

Growth in industrial production has likely stabilized. The latest PMI numbers show marginally improving domestic orders and crude steel production edged up as well, likely helped by the government's quickened pace of infrastructure investment. Crude steel production growth, although still weighed down by the reduction of obsolete capacity, picked up in April, partly helped by recovering seasonal demand and the release of some new capacity. Mirroring these developments, the decline in producer prices has slowed. By contrast, power generation growth weakened from March, probably implying softer activity in other heavy industrial sectors. Overall, we believe April industrial production grew 8.9 percent year on year.

Still no inflationary pressure. Food prices continued to decline in April on softer demand coupled with ample supply in vegetables, seafood products and pork. The high base in April 2013 possibly also helped keep year-on-year price growth low, at about 2.1 percent this year. Meanwhile, domestic raw material prices are coming out of the trough as seasonal construction and investment activity kicks off, led by metals and chemicals. This possibly resulted in a modest sequential recovery in producer prices, narrowing the year-on-year decline of headline PPI to 1.8 percent in April.

Steady credit growth in April. Interbank liquidity conditions remained stable during April, with the 7-day repo rate staying at around 3.4 percent, on average, helped by PBOC's cautious liquidity management against the backdrop of more volatile foreign exchange flows. Lending by the big four banks was reportedly solid during the first two weeks of April. As such, we believe new renminbi loans increased by 800 billion yuan in April, in line with the seasonal pattern. Meanwhile, with CBRC recently tightening regulations on "non-standard debt investment" by rural financial institutions, the regulatory environment has toughened on off-balance sheet credit activity. We believe new total social financing (TSF) reached 1.5 trillion yuan in April, lower than the 1.7 trillion yuan recorded a year ago. This brings overall credit growth from 16.8 percent year on year in March to around 16.2 percent year on year in April, although still accommodative against softened nominal GDP growth.

Major stimulus is off the table but more mini support could be in sight. The Politburo meeting on April 25 confirmed that China's economic growth has stayed in "target range" with the labour market remaining in resilient shape, although it admitted lingering downside risks. The authorities refrained from major stimulus by asking both fiscal and monetary policies to maintain their current stances but promised to lend more support to the real economy by releasing more growth-friendly reform measures and accelerating key investment projects into the pipeline. These include faster disbursement of fiscal transfer and appropriate management of liquidity conditions, further removing government regulations and approvals, accelerating railway construction in central & western regions and energy cleaning projects, asking policy banks to provide more support on shanty town renovation, pushing through regional development and new urbanization, as well as supporting household consumption and service industries such as IT, tourism and healthcare, among others. As such, we expect the tug-of-war between policy support and property slowdown to continue. In the coming months, we think local governments may relax the current property restrictions if property activities weaken further.

The article is coauthored by Wang Tao, chief China economist at UBS, and Harrison Hu, UBS economist. The views do not necessarily reflect those of China Daily.