It’s beginning to play out as expected. Chinese headline growth for April was absolutely fine with year-to-date numbers still wildly distorted but falling back to earth roughly in line with expectations. Industrial production was 9.8%, retail sales 17.7% and fixed asset investment at 19.9% from last year’s depressed levels:
At first glance, even construction sectors look good with real estate sales still wildly inflated from base effects:
But that’s where the good news ends. Floor area construction starts are down roughly 10% for the fourth month in a row from 2019 levels, let alone last year’s juiced numbers:
This has led to a sharp peak in floor area under construction growth as stock catches down to flow, from 11.2% in the year to March to 10.5% in the year to April:
By year-end I expect this number to fall towards zero as catch-up growth ends just as various tightening measures come to bear. (That is, the blue line which estimates total area under construction will end up the same as 2020).
Moreover, 2022 shapes as the first-ever year in which floor area under construction falls, depending upon the gumption of authorities.
For now, it’s still a steel and cement party:
That cement number shows there is still strong support from infrastructure activity as well, for now. Fixed asset investment is strong in both public and private businesses. I expect the former to decline as the year goes on:
As for retail, it all still looks pretty good:
Capital Economics is less sure:
The headline growth rates don’t tell us much about the economy’s current momentum, however, since they remain distorted by base effects from last year’s COVID-19 downturn. Instead, it makes sense to focus on seasonally adjusted m/m changes. On this basis, momentum in industry continued to soften, with growth in output edging down from 0.6% to 0.5%, the slowest pace since the pandemic hit last year. Survey data suggest this was partly due to supply constraints.
The picture on the demand side is mixed. On the one hand, investment spending accelerated, from 1.5% m/m to 2.2%, much higher than its pre-pandemic pace – it averaged 0.5% m/m in 2019. This was driven by an uptick in manufacturing and infrastructure investment.
On a more downbeat note, growth in retail sales fell from 0.9% m/m to just 0.3%. A slowdown was to be expected as the initial boost from the relaxation of virus containment measures in March faded. But that doesn’t explain why sales growth fell well below its pre-pandemic pace – average growth in 2019 was 0.7% m/m.
Looking ahead, we think the rebound in consumption should gather pace again in the coming months as the labour market continues to tighten. The surveyed unemployment rate fell from 5.3% to a 17-month low of 5.1% last month. But at the same time, the current strength of investment spending is unlikely to be sustained for long given the recent withdrawal in policy support and slowdown in credit growth.
A large commodity demand air pocket is rapidly expanding under the surface of Chinese growth. The question is when will the floor cave in?
My best guess is the wait will be measured in months not years.