It was just yesterday when we noted the sharp collapse in the Chinese credit impulse, when in May, the PBOC reported that Total Social Financing grew at the slowest pace since July 2016.
Barely 24 hours later, and China served not one but two major surprises that were the direct result of the sharp slowdown in China’s credit dynamo.
On Thursday, China reported activity data including industrial production, fixed asset investment and retail sales, which missed across the board, and were the starkest confirmation yet that China’s economy is finally starting to cool under the weight of a multi-year crackdown on riskier lending that is pushing up borrowing costs for companies and consumers, and has led to a surge in corporate defaults.
The number suggested further weakness ahead if Beijing perseveres with its crackdowns on pollution, questionable local government spending and off-balance sheet “shadow” financing, which as we reported yesterday tumbled at the biggest monthly pace on record.
The data, which showed the slowest investment growth in over 22 years, “was all shockingly weak by Chinese standards,” said economists at Rabobank. “Get ready for headlines talking about Chinese deleveraging hitting the economy – except it isn’t even deleveraging yet! China is walking more of a tightrope than markets believe – and the data underline that issue clearly,” they said.
The numbers in question:
Industrial production (IP): +6.8% yoy in May, missing consensus est of +7.0% yoy; and down from April: +7.0% yoy, +6.6% mom annualized.
Retail sales: +8.5% yoy in May, missing conesnsus of +9.6% yoy, and down from April: +9.4% yoy, the slowest since June 2003.
Fixed asset investment (FAI): +6.1% ytd yoy in May, missing consensus est: +7.0% yoy; and same as April yoy: +6.1%. This was the slowest pace since at least February 1996.
FAI growth slowed mainly on lower infrastructure investment growth
Industrial production growth decelerated in May
As Reuters notes, China has been walking a fine line between rolling out measures to curb financial risks and pollution and tapping the brakes so hard that business activity slows sharply. Much of their effort so far has focused on the banking sector rather than corporate debt reduction or deleveraging – possibly explaining why China’s headline growth has been so surprisingly solid, prompting some such as Morgan Stanley to wonder if Chinese credit impulse has decoupled from the Chinese economy. Now we can confirm it …read more