China Data Dump: Moderation, but no Stimulus in Response

Most countries report economic data over a course of a month. China releases most of it a couple of days and this weekend was such a period. To summarize, China reported weaker imports and exports, but a larger overall trade surplus, lower inflation and weaker bank lending. 

Industrial output, retail sales and fixed asset investment were in line with expectations and suggests the world's second largest economy is expanding in line with the first quarter pace of 7.7%. The government targets 7.5% growth this year and is unlikely to provide fresh stimulus for the economy.

China reported the May trade surplus widened to $20.43 bln $18.16 bln in April.  China's trade data is among the most controversial of its reports. The government recognizes that the trade account was being used to conceal capital flows and last month began cracking down.  A Bloomberg poll found that the consensus among analysts was that the Jan-April export growth was overstated by 4-13 percentage points.  

In May export growth slowed to 1% on a year-over-year basis from 14.7% in April.  Arbitrage trade with Hong Kong was curbed.  Chinese exports to Hong Kong were $28 bln compared with $39.5 bln, according to the PRC data.  Trade with the bonded areas, which are located within the PRC proper and handles international trade fell to reflect only a 45.8% increase in May on a year-over-year basis from April's reports 253.5% increase.  

China reports that its imports fell 0.3% and many analysts interpreted that to mean weak domestic demand.   This may be true, though the 12.9% rise in May retail sales, the same as April, does not reflect it.  In addition, much of what China imports is really inputs for exports.  This means that weakness in imports may reflect softness in foreign demand just as much as Chinese.  This is borne  out in the trade figures with the US, where for the first time in 4-years both imports and exports fell (exports to the US slipped 1.6% year-over-year in May, while imports from the US eased 1.5%).

Moreover, many observers do not appear to be giving sufficient recognition to the fall in commodity prices.  In effect, China, which imports commodities and raw materials and exports finished goods is have a modestly constructive terms of trade shock.  Consider that the volume of iron ore imports, for example, rose 7.4%, while the value only increased by 1%.   This is also reflected in the slightly larger than expected decline in producer prices (2.9% year-over-year rather than the consensus 2.1% after April's 2.6% decline).  

Chinese inflation is also slowing.  Some observers have claimed that Japan is exporting deflation, but you won't find evidence for that here.  Even the decline in iron ore prices noted above are hardly the doings of Abenomics.  Rather excess capacity in China's steel industries is the most likely culprit.  China's consumer prices fell 0.6% in May after a 0.2% increase in April.  

At 2.1% in May from a year ago, China's consumer prices are 2.4% above a year ago, which is the slowest pace in three months.  The main driver was a nearly 14% decline in vegetable prices, something that is difficult to tie to Japanese monetary policy.  Food makes accounts for a third of China's CPI basket.  

Industrial output (9.4%), retail sales (12.6%) and fixed investment (20.4%) were all in line with expectations and only investment slowed from April and that was by a rounding error (0.1%).  Retail sales ticked up from 12.5% in April, but must also be considered flat.  

The biggest surprise was in the bank lending data.  New yuan loans extended in May slowed to 667.4 bln from 792.9 bln in April. The Bloomberg consensus anticipated CNY850 bln in new loans.  Aggregate social financing, the broadest measures, picking up at least parts of the shadow banking sector, slowed to CNY1.19 trillion from CNY1.75 trillion.  The consensus was for CNY1.6 trillion.  

Signs point to a slowing of capital inflows into China.  Our point is that an important part of those inflows are not from foreign investors, but from Chinese investors themselves.  The yuan balances in local banks is understood to be a gauge of these capital inflows.  They were CNY294 bln (almost $50 bln) in April and appear to have slowed almost two-thirds in May. 

Chinese markets will be closed in the first half of next week for the Dragon Boat Festival.  The holiday appears to have exacerbated the tightness in the Chinese money market before the weekend.  The Shanghai Composite has fallen for seven consecutive sessions and the holiday may not prevent a test on this year's low, seen in April near 2167, which is a little below the 200-day moving average (2188).  

The yuan had moved broadly sideways against the dollar from last October through March.  Since then it has been in a new appreciation trend.  It has gained almost 1.6% against the dollar, which may seem insignificant, but that gain is larger than other emerging market and G10 currencies thus far this year.  There continues to be speculation of that Chinese officials may widen the band that the dollar-yuan can trade from the official fix.  That band is currently stands at one percent and it has hardly been used in is fullness.