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A worker adjusts a cotton string roll at a textile factory in Hangzhou, in east China's Zhejiang province, on January 21. An official measure of China's manufacturing improved in January but forecasters say economic activity is sluggish as leaders try to resolve a tariff battle with Washington. Photo: AP
Opinion
Aidan Yao
Aidan Yao

China’s weak economic data is likely to prompt more stimulus measures and a softer tone towards the US

  • The data from January and February will motivate the government to announce greater stimulus measures and take a more conciliatory stance in the ongoing trade negotiations with the US
  • The result is likely to be only a mild recovery in the second half of the year
Aidan Yao
Aidan Yao
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The latest data released by China’s National Bureau of Statistics confirms a weak start to the year for the country’s economy. The bureau combines data for January and February to screen out volatility caused by the Lunar New Year festival. The figures reaffirm the sluggishness seen in other indicators, such as the Purchasing Managers’ Index (PMI) and trade and domestic prices, suggesting economic headwinds remain strong. 

In particular, growth in industrial production fell to its lowest since 2009, to 5.3 per cent year on year. The bureau noted that, after adjusting for the Lunar New Year impact, the growth rate rebounded to a six-month high of 6.1 per cent. However, this adjustment is questionable, because combining the January and February numbers is already an attempt to smooth out the impact of seasonal factors and a boost in industrial production growth would be inconsistent with the softness seen elsewhere in the economy.

The usual suspects are to blame for the weakness: auto output is still contracting, down 15 per cent year on year. Telecoms equipment production, including mobile phones, was also weak, falling by 12 per cent. While this might be partly a result of the declining global tech cycle, lacklustre domestic demand could also have played a role.

This data is likely to encourage the government to roll out additional stimulus measures, including a new round of auto and appliance subsidies. The newly announced value-add ed tax ( VAT) cut will also help, particularly the manufacturing sector, although its impact will take time to be felt.
Employees work on the production line of a JAC Motors plant in Weifang, Shandong province, China, in November 2018. Auto output declined in the first two months of the year. Photo: Reuters

Soft external demand is partly to blame for the economic weakness. After a brief seasonality-induced recovery, export growth fell in February, as the impact of the trade war and slowing global demand became apparent. Not surprisingly, PMI export orders fell to their lowest level since 2009, suggesting the outlook for Chinese exports remains bleak.

This is likely to put pressure on Beijing to take a more conciliatory stance in the ongoing trade negotiations with the US, as the two try to iron out their differences. A deal that removes all existing tariffs will be positive for market sentiment and help to alleviate export pressure. But the full impact on the economy will also depend on how much more China agrees to import from the US. If such imports substitute for domestic production, the overall impact on growth and on China’s current account could be negative in the long run.

Compared to the weak external backdrop, domestic demand has held up better, although there may be doubts about its sustainability. Both retail sales and fixed-asset investment came in better than expected, with the former flat at 8.2 per cent in December, while the latter actually accelerated, to 6.1 per cent.

China’s Lunar New Year spending growth slows to decade low
The strength in fixed-asset investment mainly came from a 2-percentage-point growth acceleration in real-estate investment. However, it is hard to imagine how this growth can be sustained, with home sales declining 3.6 per cent year on year and property developers’ land acquisitions falling sharply. As construction activity inevitably follows the leading indicators on their downward trajectory, more policy easing should be expected at the local level, although the hurdles for a nationwide policy reversal remain high.

The flat reading on retail sales growth was a pleasant surprise, but its sustainability is also questionable, given the deteriorating labour and housing market conditions. The official survey-based unemployment rate jumped to 5.3 per cent in February, its highest since early 2017. While the move might have been exacerbated by seasonal factors, it is still of concern, especially when the PMI employment index is taken into account; this has been weakening for some time. Given the importance of employment in driving consumption and social stability, a further deterioration could be a strong catalyst for a bigger policy response.

All in all, the latest data suggests the Chinese economy is not out of woods yet. While policy support has been ramped up, with Premier Li Keqiang promising more action to come, these stimulus measures will take time to filter down. A few more months of economic darkness can be expected before the light at the end of the tunnel is visible. Even when that happens, the response is likely to be a mild recovery in the second half of the year, as opposed to the “V-shaped” rebound seen in 2009, given Beijing’s more cautious approach this time.

Aidan Yao is senior emerging Asia economist at AXA Investment Managers

This article appeared in the South China Morning Post print edition as: Expect stimulus measures and a softer tone towards the US
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