The Chinese economy is still struggling to recover and no good news came from the May data released over the weekend, suggesting that the economy will remain weak in Q2. However, a significant worsening in the economy seems unlikely, because growth in investments and industrial production, albeit at a low level, has not deteriorated much. For the remaining of this year, the Chinese economy will remain close to the bottom of the U-formed recovery.
The largest disappointment came from foreign trade. Chinese exports in May grew by only 1% y/y and imports fell by 0.3%. This was caused by a plunge in exports to Hong Kong and likely reflects that the recent over-reporting has disappeared as a result of strengthened control on data manipulation. Imports growth has fallen more than exports growth, due to weak domestic demand but may also indicate that exporters are pessimistic about future outlook, as a relative large share of exports are produced using imported inputs. Since the large drop in trade figures are mainly caused by data reporting issues rather than a sudden worsening in underlying demand, the implications on overall growth are rather limited. The recent trade dispute between China and EU is likely to lead to persistent soft bilateral trade between them.
Another negative surprise came from the weak credit data. Domestic bank lending in May landed at just 667bn yuan, 20% lower than the expected 850bn yuan. However, on an accumulated basis, the lending trend so far this year is basically the same as same period last year. The overall credit growth in the system, which includes corporate bonds and trust loans but not the unregulated wealth management products, is actually fairly high, so liquidity is not as tight as the official lending figure suggests.
The CPI inflation eased in May to 2.1% against an expected rise to 2.5%. Decomposition shows it was triggered solely by a fall in food prices, more specially prices in fresh vegetables. Nonetheless, the non-food inflation remained at a very low level (1.6% y/y), another sign that the domestic demand is on the soft side.
Nordea