China's potential growth dilemma

A slew of high-profile economic figures were released from China today, with mixed results. China’s GDP growth slowed sharply in Q1, falling to its lowest level in six quarters. Yet, the world’s second largest economy grew slightly more than the market was expecting at 7.4% y/y (expected 7.3%, prior 7.7%), but below Beijing’s annual growth target of 7.5%.

The market is asking: is today’s data going to prompt policy makers to boost stimulus or retain current policy? At first glance, below target growth this early in the year may suggest Beijing should do more to support the economy, but it’s not that simple. While the government has previously stated that it is looking for year-end growth of around 7.5%, it added that it’s comfortable with lower levels as long as there are no major fluctuations and employment holds up. This means that calling for more stimulus on today’s GDP figures alone is probably a bit hopeful.

There’s a lot of disappointing data coming from China…

However, it isn’t today’s GDP data that’s really concerning the market; it’s the deteriorating state of numerous economic indicators and their potential implications for growth going forward. In fact, many economists have already downgraded their growth forecasts for China from the start of the year.

Sentiment in the manufacturing sector has been broadly deteriorating this year and other trade exposed sectors also appear to be struggling, with exports and imports taking a massive hit March. This is despite suggestions at the beginning of the year that stronger demand from Europe and the US would support China’s economy. Furthermore, China’s industrial engine slowed to a five-year low last month, with industrial production decelerating to an annual pace of 8.8%, and fixed asset investment unexpectedly dropped to 17.6% from 17.9%.

Are credit conditions tightening?

Also in March, money supply fell to 12.1% from 13.3%, well below the People’s Bank of China’s (PBoC) 13% target. This raises the question: is credit too tight in China? Given the relatively high base last month’s number is being compared to, one cannot conclude that credit is overly tight, but this hasn’t stop calls for the PBoC to do more to ease funding conditions. The most likely course of action, if any, may be a cut to the Reserve Requirement Ratio (RRR) which would theoretically allow banks to lend out more as they don’t have to hold as much in reserve.

Market reaction to today’s data dump

Commodity currencies were initially bolstered by the better than expected Chinese GDP figures, although the rally in the kiwi is being held back by this morning’s weak inflation figures. AUDUSD is slowly edging higher, but the rally appears to lack momentum, at least without the help of European markets. Overall, today’s data isn’t game changing enough to materially impact the direction of the kiwi or the aussie. Nonetheless, the risk-on sentiment immediately following the data helped USDJPY establish its position above 102.00.