China’s February economic data not as bad as it seems

The data barrage out of China joins the February releases thus far, coming in mixed. While the industrial production miss continues to tell the story of slowdown, the dent had been limited with the lookout for policy support.

Event Name Actual Reuters Poll Prior
China’s industrial production (Feb) YoY YTD 5.3 5.5 6.2
China’s retail sales (Feb) YoY YTD 8.2 8.1 4.0
China’s fixed asset investments (Feb) YoY YTD 6.1 6.0 5.9

(Source: Reuters)

The details – industrial production flails

The data dump out of China on Thursday, namely industrial production, retail sales and fixed investments (FAI), had been mixed as shown in the table above. Of which, particular attention had been the industrial production miss, falling to 5.3% year-on-year for the combined January to February reading. This marks the lowest figure seen since March 2009 and had evoked an immediate reaction across the likes of the AUD/USD touching the intraday low shortly after release. Regional equity markets had also erased early gains that had been clocked with an improvement in risk sentiment.

That said, one would not have missed the likes of retail sales and FAI leaning towards the positive, surprising moderately at 8.2% and 6.1% respectively. Retail sales activity showed the first sign of rebound after falling steadily through 2018. As for fixed investments, while the infrastructure and manufacturing sectors continued to slow, the others had to pick up the slack. Altogether, suggesting the picture had not been as dire for the market.

Seasonal effect for markets

Looking back at the data releases thus far, we have certainly seen a mixed bag of indicators in the month of February. To recap, we have seen the PMI numbers sustaining in contraction territory, though the official NBS number and the private Caixin gauge had gone in different directions. What had been similar between the two had been the pick up in new orders back into expansionary territory, suggesting that demand is improving.

External demand, however, remained weak as seen through the trade numbers last week. Exports shrank to the weakest in three years with headlines sparking concerns of a ‘trade recession’. This may be one area that would warrant continued attention in light of the US-China trade dispute in the background. To some extent, the market had attributed a significant portion of the poor showing towards Chinese New Year holidays distortions whereby fewer work days were accounted for. However, going into March, the numbers could carry more weight for markets that direly needs clearer direction on how growth is going.

Policy support

As we have derived from the latest 2019 National People’s Congress work report, the growth target had been lowered to 6.0% to 6.5% from 2018’s ‘around 6.5%’. More importantly, though, it is the suite of policies announced including the bigger-than-expected corporate tax cut of over 2.0% of 2019 estimated GDP that had been a pleasant surprise. Mostly aiding the pained manufacturing sector, the move reflected the government’s commitment to curb the slowdown and tails the series of policies such as the reserve requirement ratio (RRR) cuts. The effect is expected to show up in data as we progress through the year, and any positive contrast from the persistence of contractionary manufacturing PMIs would be one to relief markets of the current fears.

Looking at how that would translate to market action, the present and expected policy support certainly helps in lifting the outlook for the Chinese economy from the state of fear that had built up through 2018 and could see continued gains for the Chinese market. Economic indicators would nevertheless have to reflect further stability to help bring in the gains and this will be barring any sudden turn for the worse in US-China trade ties. Look to the likes of the China A50, CSI 300 or regional markets such as the Hang Seng index to capture these gains.


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