The first set of official Chinese data came out post the Lunar New Year holidays clearly indicates a major dent to 1Q growth as officials locked down the country to prevent the spread of the coronavirus. Retail sales, fixed asset investment and industrial production dropped by double digits in the first two months and came in much weaker than consensus estimates. However, this wasn't a big surprise to markets as the domestic equity market, CNY and CNH were all relatively unchanged post the data release. Given the plunge in the manufacturing and services PMI earlier this month, this has already served as a preview on what to expect in these Chinese data.
We are monitoring four metrics to measure the pickup in momentum across the Chinese economy since the collapse in February.
- The pollution indicators published by the US EPA and Department of State show that major tier-1 cities are still indicating subpar manufacturing momentum. We have not seen much deterioration in pollution levels across Shanghai, Beijing and Guangzhou, but the likes of major tier-2 manufacturing hubs such as Chengdu and Shenyang have improved at the margin.
- According to WeBank China Economic Recovery Index (WCRI), it took around 40 days post Lunar New Year for the workforce to fully return to operation in 2019 while the current indicator points to 75% capacity. This has strongly improved from 45% at the end of February.
- Iron ore imports have slowed down in January and collapsed to the lowest level ever in February, but March levels look more promising and hopes that fiscal impulse could soon boost the economy.
- It was reasonable to expect a sharp fall in total floor area sold at the beginning of every year due to the Lunar New Year holiday, but momentum tends to pick up approximately one month post the holidays. However, as we enter the month of March, gross floor area sold averaged 0.8 million square meters, compared to 2.1 million square meters from 2017 to 2019, which indicates that 2020 was 61% below the three-year average.
With supply side disruption showing signs of enhancement, Chinese officials will need to turn their attention to revive domestic consumption. With global central banks moving towards a coordinated response and pushing rates back to levels only seen in the global financial crisis, we believe the People's Bank of China (PBoC) will also follow suit with their version of monetary stimulus. While we cannot rule out that the PBoC could push benchmark rate lower after leaving it practically unchanged since 2015, the impact of such move to the real economy is rather limited. The benchmark rate is already near its lowest level in the last few decades as the PBoC has aggressively reduced rates during the 2015 market rout while many new loans have moved away from the benchmark rate and instead takes reference based on the medium-term lending facility (MLF).
It is much more effective to lower the MLF and subsequently the Loan Prime Rate (LPR) to provide funding to consumers and banks with less capital buffers. On the other hand, the use of targeted lending facilities by policy banks such as Pledged Supplementary Lending (PSL), are vital to boost infrastructure investment as well as extend interest payments and tax cuts to private enterprises.
We believe a combination of monetary stimulus and fiscal spending is much needed to hope for a rebound in the second quarter after the collapse in the first two months.
Ben Luk is senior multi asset strategist at State Street Global Markets