Lordy, China data is a mess. Base effects have distorted everything. If we look through the fog what we find mostly is a disappointment. First-quarter GDP was only 0.6%, far below the forecast 1.4%. That is disguised by year on year figures which are wonky as anything 18.3%:
The internals for the month of March were just as warped with industrial production at 14.1% versus 18% expected, retail sales at 34.2% beating 28% expected and fixed asset investment was 25.6% YTD roughly as expected. Below is the distorted YTD chart:
There are 2045 words left in this subscriber-only article.
Start your free 14-day trial today!
Turning to particular segments, house prices have firmed a little in March up 0.4% and 4.6% year over year:
The rise has broadened:
But price gains are still dominated by lower tiers:
New property sales are so corrupted by base effects that I can’t even work them out:
But the picture is clearer in new floor area starts which continued the early trend of weakness, down -4% on 2019 for March.
And down 6.6% versus 2019 over the quarter. This is very weak and strengthens the case that the “three red-lines” policy has curbed construction already:
However, total floor space under construction is still up a massive 11.2% as catch-up growth and last year’s starts are yet to complete. If the flow of starts is being disrupted by policy changes then it will show up in the stock chart before long:
Fixed asset investment more broadly is very hard to interpret, again given base effects, but it is being led by manufacturing and infrastructure:
Steel output remains preposterous:
But, cement is soft, which is just plain confusing:
Meanwhile, scrap-fed steel output jumped to its highest ever proportion as imports were lifted:
This is some crazy-arse data. The case that policy-led restructuring is materially impacting the property sector has strengthened but there are contradictions throughout.
The conclusions of Capital Economics sum it up:
China’s GDP growth jumped to a record high in y/y terms last quarter. But this was entirely due to a weaker base for comparison from last year’s historic downturn. In q/q terms, growth dropped back sharply and, with the exception Q1 of last year, was slower than at any other time during the past decade.
GDP growth soared from 6.5% y/y in Q4 to 18.3% last quarter (the Bloomberg median was 18.5% and our forecast was 20.0%). This tells us little about the economy’s current momentum, however, since it reflects a much weaker base for comparison from last year’s COVID-19 downturn. Instead, it makes sense to focus on seasonally adjusted q/q changes. On this basis, growth was 0.6% in Q1, down from 2.6% in Q4. Our in-house measure, the China Activity Proxy (CAP), also points to activity levelling off last quarter. Our initial estimate, based on full data for January and February and partial data for March, is that the economy grew 0.4% q/q in Q1, down from 2.8% in Q4.
The breakdown of the GDP data shows that growth in industry and construction softened last quarter, from 2.3% q/q to 1.3%. And the recovery in service sector growth reversed, from +3.9% q/q to -2.3%. A more detailed breakdown will be published tomorrow.
The March data that were released today are also distorted by base effects so we focus on the seasonally-adjusted m/m changes. On this basis, retail sales improved from 1.5% in February to 1.8% last month. Fixed investment held steady at 1.5%. But industry softened slightly, with output growth edging down from 0.7% m/m to 0.6%.
All told, momentum looks to have been broadly stable in March. But this was not enough to prevent a weaker Q1 following a slowdown around the turn of the year. The upshot is that with the economy already above its pre-virus trend and policy support being withdrawn, China’s post-COVID rebound is levelling off. We expect q/q growth to remain modest during the rest of this year as the recent boom in construction and exports unwinds, pulling activity back towards trend.