China Stimulus Paying Off

For anyone doubting whether China’s monetary and fiscal stimulus measures are having any impact, the recent slate of March data releases should allay such concerns. While a soft base early in the year may explain some of the bounce in March there is little doubt that China’s growth engine is beginning to rev again.

China data released today was firmer than expected almost across the board. Notably industrial production rose 8.5% y/y (consensus 5.9%), retail sales were up 8.7% y/y (consensus 8.4%) and last, but not least, GDP rose 6.4%, slightly above the market (consensus. 6.3%).

This data follows on from last week’s firm monetary aggregates (March new loans, M2, aggregate financing) and manufacturing PMIs, all of which suggest that not only is stimulus beginning to work, but it could be working better than expected. The turnaround in indicators in March has been particularly stark and has managed to overcome the softness in data in Jan/Feb.

The data is likely to bode well for risk assets generally, giving a further boost to equities, while likely keeping CNH/CNY supported. Chinese equities are already up around 36% this year (CSI 300) and today’s data provides further fuel. In contrast, a Chinese asset that may not like the data is bonds, with yields moving higher in the wake of the release.

Indeed with credit growth likely to pick up further this year and nominal GDP declining, China’s credit to GDP ratio is on the up again, and deleveraging is effectively over. This does not bode well for bonds even with inflows related to bond index inclusion.

For the rest of the world’s economies, it will come as a relief that China’s economy is bottoming out, but it is important to note that China’s stimulus is largely domestically focussed. The global impact will be far smaller than previous stimulus periods, suggesting that investors outside China shouldn’t get their hopes up.

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