China’s Growth Bump May Dent Urgency for More Stimulus

Economy seen as stabilizing but consumer demand remains weak
Production, investment strength may delay stimulus: economists

China’s strong factory output and investment growth at the start of the year raised doubts over how soon policymakers will step up support still needed to boost demand and reach an ambitious growth target.

Industrial output rose 7% in January-February from the same period a year earlier, the National Bureau of Statistics said Monday, the fastest in two years and significantly exceeding estimates. Growth in fixed-asset investment accelerated to 4.2%, strongest since April. Retail sales increased 5.5%, roughly in line with projections.

“With the recovery in these data, policymakers will likely not see the need to do more than what they plan to do,” said Michelle Lam, Greater China economist at Societe Generale SA. It will take a “much bigger slowdown” for authorities to shift their policy focus to stimulating household income and spending to support consumption, she said.

The strong industrial and investment figures add to evidence that some parts of the world’s second-largest economy are gaining traction after policymakers ramped up stimulus late last year. Earlier, export growth exceeded expectations.

The data may also weaken the case for policymakers to loosen monetary policy and lessen the impetus to campaign for domestic consumption to drive growth more, according to analysts.

Investors are looking for clues on how the government intends to build and sustain momentum to reach a growth target of around 5% — a goal similar to last year’s but harder to attain given a less favorable comparison base. The ambitious target, announced earlier this month, was met with skepticism by some economists due mainly to a perceived lack of sufficient policy support.

The urban jobless rate rose to 5.3% from 5.1% as of December, reflecting a gloomy labor market that’s weighing on domestic demand. The property sector remained a major drag on the economy, with investment falling 9% and housing sales plunging 33% by value in the January-February period from a year ago.

“Better-than-expected Jan-Feb data conceals hidden risks. The government still needs to ramp up policy support and focus on additional tools to stabilize housing demand,” said Carlos Casanova, senior Asia economist at Union Bancaire Privee in Hong Kong.

The benchmark CSI 300 Index closed up 0.9% at its highest level in more than four months, while the Hang Seng China Enterprise Index gained as much as 0.8%, on track to snap a three-day losing streak. The yuan was little changed in both onshore and offshore markets. The 10-year bond fell 1 basis point to 2.34%, down for the second session.

“The economy kept rebounding and improving in January and February with various policies taking effect. But we also need to see that the external environment is increasingly complex, grim and uncertain, and the problem of insufficient domestic demand still remains,” the NBS said in a statement accompanying the release.

Industrial production benefited from improved exports, which rose 7.1% in the first two months of the year, well above economist forecasts.

“South Korean and Taiwanese exports are leading the rebound in the region, but China remains vertically integrated in global value chains, and so will also benefit from improving external demand,” Casanova said.

While retail sales growth slightly undershot the median forecast, categories belonging to what ING economist Lynn Song called the “eat, drink and play” theme recorded strong growth at the start of the year, with alcohol and tobacco rising 13.7% and recreational goods increasing 11.3%. Communications equipment jumped 16.2% and automobiles rose 8.7%.

	Industrial Production	Retail Sales	Fixed Asset Investment (YTD)
Jan. to Feb.	7%	5.5%	4.2%
Forecast	5.2%	5.6%	3.2%
December	6.8%	7.4%	3%

However, consumer and business confidence is still weighed by uncertain income outlook and the persisting property slump. For example, retail sales of building and decoration materials rose merely 2.1% in the first two months.

Manufacturing overcapacity is growing, fueling tensions with trade partners and casting a cloud on the export outlook.

Consumer prices rose in February for the first time in five months, but the rebound was largely helped by a spending spree during the Lunar New Year holiday and is likely short-lived, analysts said.

Beijing has sweetened its fiscal package, embarking on a program to sell ultra-long special sovereign bonds in 2024 and in the years to come. China is also fleshing out a plan to upgrade industrial equipment and boost household spending in consumer goods, pledging to help fund the program possibly worth hundreds of billions of yuan with budget money.

The People’s Bank of China has maintained a loose monetary policy stance, with Governor Pan Gongsheng flagging a willingness to inject more liquidity to support growth when necessary.

What Bloomberg Economics Says…

“It’s a still patchy picture — the growth in private investment was marginal and consumption slowed and undershot expectations. The bottom line — the recovery is fragile and requires more policy support.”

— Chang Shu and Eric Zhu, economists

Click here to read the full note.

However, the boost from the government’s on-balance-sheet spending will be offset by its separate campaign to rein in local debt risks. The central bank’s scope for more interest rate cuts is also limited by a wide yield gap with the US and low profit margins at Chinese banks.

Bruce Pang, chief economist for Greater China at Jones Lang LaSalle Inc., expects the government to use mainly fiscal policy to bolster growth in the coming months with monetary policy playing a supporting role.

“The necessity for rate cut and RRR cut has declined somewhat in the near term,” Pang said, referring to the amount of cash banks have to keep in reserve.

Wary of flooding the market with too much liquidity, the People’s Bank of China last week drained cash from the banking system via its one-year policy loans for the first time since November 2022. It also held the rate on the lending steady.

China’s bank loans expanded at the slowest pace on record in February, underscoring weakness in borrowing demand despite earlier steps by the central bank to ease policy.

The NBS doesn’t provide figures for January alone. It releases only combined readings for the first two months of each year to smooth out volatility from the Lunar New Year holiday, which shuts down most factories and businesses and can fall on either month in any given year.

Written by: Bloomberg News — With assistance from John Liu, Fran Wang, Lucille Liu, Yujing Liu, Iris Ouyang, Wenjin Lv, Hwee Ann Tan, and Lin Zhu @BLoomberg

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