China: April growth weakened due to distortions – Standard Chartered

Standard Chartered analysts point out that China’s activity weakened across the board in April with real growth rates of industrial production (IP), retail sales and fixed asset investment (FAI) slowing to 5.4% y/y, 5.1% y/y and 4%, respectively, in April from 6.4%, 7.0% and 5.2% in Q1.

Key Quotes

“The labour market was stable, with a lower unemployment rate of 5%.”

“We caution against over-reacting to a single month of weak performance. April activity was likely distorted by the following one-off factors: (1) the introduction of VAT cuts in April, which induced companies to front-load purchases in March to benefit from higher input tax deductions and accounting for the abnormal production surge in March followed by weak production in April; and (2) the longer public holidays from 1-4 May. China increased the number of working days in April to compensate for the longer May holidays, which likely delayed consumer spending from April to May. Furthermore, statistically, China tends to post slow growth at the beginning of a quarter and stronger growth in its final month.”

“We maintain our forecast of 6.5% GDP growth for 2019. We expect China to continue with its stimulus plan, including cuts to the individual income tax (last October), value-added tax (April 2019) and social-security contribution fees (May 2019). As per our estimate, the approved budget included stimulus equivalent to 1.8% of GDP.”

“We expect the People’s Bank of China (PBoC) to cut the reserve requirement ratio (RRR) by 50bps each in June and in Q3. We do not think it will use CNY depreciation as a stimulus tool, as this could backfire by destabilising domestic financial markets.”