China's CPI remains well below Beijing's target

Consumer prices rose 2.4% y/y in March as expected, comfortably below the government’s full-year target of 3.5%. This theoretically provides Beijing with room to simulate the economy and encourage growth. Pressure has been building on the government to do more to support the economy after a string of disappointing economic figures. Sentiment in the manufacturing sector has been broadly deteriorating for a while and trade exposed sectors also appear to be struggling.

China’s deteriorating economic data

Official manufacturing PMI data did unexpectedly jump last month, but it was contradicted by private sector figures that continue to suggest that the sector is contracting. Official Manufacturing PMI unexpectedly jumped to 50.3 from 50.2 (expected 50.1), signalling a continued expansion of the sector. However, HSBC manufacturing PMI fell to 48.0 from 48.1, suggesting that domestic demand is struggling. This theory is backed up by prolonged deflation in producer prices and weak import numbers, with the former and the latter coming in at a depressing -2.2% y/y and -11.3% y/y, respectively, for March. Also, China’s exports unexpectedly fell for a second straight month (actual -6.6% y/y; prior -18.1%).There is some speculation that China’s trade numbers are being distorted by fake invoicing at the beginning of last year and New Year celebrations, but it was still enough to rattle investor sentiment.

Beijing’s response

China’s response to its growth problems was to introduce a round of mini stimulus last week. Premier Li Keqiang announced plans to speed up construction of low-income housing and railway projects, as well as extending tax breaks for SMEs. It’s unlikely that we will see any massive attempts to stimulate the economy in the near-term. Li said in a speech yesterday that Beijing won’t adopt short-term and strong stimulus policies in response to temporary fluctuations in the economy. He went on to reiterate that China is seeking more sustainable and healthy growth. This is not surprising considering that the last time Beijing injected massive amounts of stimulus into the economy it resulted in a raft of problems that can be traced back to years of steroid-fuelled development.

All eyes on next week’s GDP figures

In any event, Q1’s GDP data (released on April 16) is going to be very important. The economy is expected to have grown by around 7.3% y/y during the quarter, slightly below the government full-year target of 7.5%, thus we cannot rule out some tampering with monetary policy in order to stimulate domestic demand.