Chinese Growth Continued to Slow in May

Since the beginning of the year, Chinese data, both private and public, have showed that growth is slowing in a context where Chinese government and PBOC opted for a more efficient growth.

 

Authorities want to refocus the activity from exports towards domestic consumption. Therefore, they try to improve households’ living standards by increasing the urbanization rate (more infrastructure investments) and to support housing affordability and purchasing power (lower inflation).

 

Currently, the problem is that property prices are increasing sharply as new home prices rose 4.9% YoY in April 2013 (biggest increase since Apr 2011). As a consequence, officials started to implement measures to curb prices which will penalize construction’s activity.

 

In the mean time, money supply (M2) accelerated in April reaching the highest level since March 2011 at 16.10%. This figure is well above the official target (14%) and could result in inflation in the coming months. It explains why PBOC has adopted  a less accommodative stance. Therefore, lowering interest rates or RRR seem to be excluded in the short term.

 

In these conditions, the activity keeps on slowing in May as the preliminary reading of  Purchasing Managers’ Index released by HSBC Holdings Plc and Markit Economics was 49.6 down from 50.4 in April. It shows that China’s manufacturing is contracting for the first time in seven months, adding to signs that economic growth is losing steam for a second quarter.

 

According to Bloomberg data, this negative signal is confirmed by imported iron ore price which has declined significantly since mid-February 2013 and reached today its lowest level since October 2012.

 

 

Investors and economists will look closely at the official manufacturing PMI which will be published on Saturday. According to our analysis, it is likely that this figure will be below consensus (50) and will confirm the contraction in manufacturing sector. Let we see…