April’s data show China’s rebound is broadening, thus making it likelier our forecast for GDP to grow by a strong 8.7% this year will be achieved.
Source: Bank of Singapore, Bloomberg
Exports and investment are supplanting industrial production as China’s engines of growth while consumption still has scope to rebound further.
Last month China’s exports increased by a very high 32.3%YoY. In addition, April’s activity data released this week shows fixed asset investment rose 19.9%YoY compared to industrial production growth of 9.8%YoY (see first chart). In response to the pandemic last year, China’s government pushed state-owned enterprises to increase industrial production to support the economy. But this year stronger exports and investments show the recovery is becoming more balanced.
Source: Bank of Singapore, Bloomberg
In contrast, consumption is still lagging. April’s retail sales increased by 17.7%YoY but only rose 0.3%MoM compared to gains of 1.5%MoM in fixed asset investment and 0.5%MoM for industrial production. Consumption, however, still has scope to rebound as the pandemic eases.
China’s V-shaped recovery is starting to put upward pressure on inflation. In April, producer prices increased by 6.8%YoY as higher commodity prices boosted firms’ costs. Consumer prices also rose though at 0.9%YoY headline inflation remains tame, enabling the People’s Bank of China to refrain from raising interest rates despite the economy’s rebound.
The central bank may also keep interest rates unchanged this year as credit growth is slowing. The second chart shows total social financing - a measure of broad credit growth - hit 13.6%YoY in 2020 as local governments issued bonds to finance infrastructure projects during the pandemic. But with the crisis easing now, local governments are reducing their borrowing. Thus, total social financing slowed to 11.6%YoY in April.
Though China’s easy gains from reopening have now been realized, growth is still set to be firm for the rest of 2021. Vaccinations should spur consumption while exports and manufacturing investment are likely to stay supported by strong external demand for China’s goods during the pandemic. We forecast the CNY to rise to 6.15 against the USD over the next 12 months.
