China: weak July data suggests recovery remains fragile

The Chinese data released this morning was weaker than expected across the board although it has not changed our view that the Chinese economy will continue to recover moderately with a peak in the manufacturing PMIs around September/October. However, today’s data suggests that the recovery remains fragile with particularly downside risk from the property market.

Growth in industrial production in July eased slightly to 9.0% y/y (consensus: 9.2% y/y) from 9.2% y/y in June. Seasonally-adjusted industrial production increased 0.8% m/m in July after increasing 0.9% m/m in June, according to our calculations. The smoothed monthly changes in industrial production are still broadly consistent with the improvement we have seen in the manufacturing PMIs in recent months (see chart below). The lower y/y growth in industrial production is also consistent with our view that y/y growth in GDP is poised to slow to 7.4% y/y in Q3 from 7.5% y/y in Q2, largely due to a base impact from stronger growth in Q3 13 (see chart below). This development is still consistent with GDP growth accelerating to above 9% q/q ann. in Q3 from about 8.0% q/q ann. in Q2 (see chart below).

Investment demand continues to look relatively weak driven primarily driven by a weak property market, but there are also signs that the positive impact from the mini fiscal stimulus (primarily higher infrastructure spending) earlier this year has started to wane. Growth in fixed asset investments in July eased to 17.0% YTD y/y (consensus: 17.4% YTD y/y ) from 17.3% YTD y/y in June. According to our calculations, this suggests that growth in fixed asset investments eased to 15.5% y/y in July from 17.9% y/y in June.

Looking closely at housing, the details are mixed. Growth in housing starts actually improved markedly to 3.4% y/y from -13.8% y/y in July. However, growth in sales of new homes in July slowed markedly to -17.9% y/y from -3.5% y/y in June. Sales of new homes tend to lead housing starts so the slowdown in sales of new homes is a bit of a concern. Investment within transportation (a crude measure for infrastructure investment) also eased substantially from 21.3% y/y in June to 11.1% y/y, indicating that the positive impact from the mini fiscal stimulus earlier in 2014 has started to wane.

The weak investment picture was also evident in credit growth in July. Total credit growth (total social finance) in July slowed to 16.3% y/y from 17.1% y/y in June, according to our calculations. Seasonally-adjusted total credit only increased 0.7% m/min July after increasing 1.5% m/m in previous months. Both corporate bond issuance and loans from trust funds were weaker in July (see chart below). The big question is whether the very weak credit and investment data in July will prove to be just a blip. So far, there have been no signs in the money market that credit conditions should have tightened in July.

So far, we maintain our view that China remains in a moderate recovery albeit we will probably see a peak in the manufacturing PMIs in September/October as the impact from fiscal stimulus starts to wane. The foreign trade data released last week suggests that the economy is now getting substantial support from exports, but overall the investment side is weak with downside risk particularly from the property market. After today’s weak data, upside and downside risk have again started to look more balanced after data for some time suggested mainly upside risk on our forecast (GDP growth: 7.5% in 2014 and 7.3% in 2015).

Regarding CNY, we still expect the recent months’ gradual appreciation to continue for the rest of H2 14, supported by an increasing trade balance surplus.