China: Some encouraging signs in mixed May data

All in all, the May data were mixed but there were some bright spots, particularly exports and imports and signs of improvement in the housing market. The data indicate that activity in the economy stabilised in May after the very weak data for April. Inflation decelerated more than expected and the Peoples Bank of China (PBOC) cut the key interest rate by 25 basis points to 6.31% last week (Chart 1). Combined with previous cuts in the reserve requirement ratio, this is a clear signal that government has adopted a more active macro policy. However, GDP growth will still be weak in Q2, within the 7.5 to 8.0% year-on-year range; a further slowdown compared to growth of 8.1% in Q1. The May data support our long-held assessment that, barring a major external shock, a hard landing can be avoided. However, compared to Nordic Outlook May, the GDP forecast has been cut to 8.1% for 2012 (from 8.5%) and to 8.4% for 2013. Headline inflation decelerated to 3.0% in May. Food inflation dropped to 6.4% and core inflation continues to hover close to 1.5% (Chart 2). Inflation has decelerated substantially since its peak last summer and should no longer be a hindrance to further policy loosening. The official purchasing managers index (PMI) dropped to 50.4 in May. The arguably more reliable Markit/HSBC PMI has been below the 50 level since November 2011 and dropped to 48.4 (Chart 3). Exports and imports rebounded in May and clearly beat expectations, with growth of 15.3% and 12.7%, respectively, year-on-year (Chart 4). Industrial production was weak, with growth at 9.6% year-on-year, and retail sales continued to decelerate (Chart 5). However, sales of passenger cars increased by close to 23% year-on-year and reached 1.28 million (Chart 6). Bank lending increased in May. New loans issued by financial institutions totalled 793 bn yuan, up from 682 bn in April and were larger than expected (Chart 7). Housing prices continue to fall in year-on-year terms (Chart 8) but the number of sales is rising, indicating the beginning of stabilisation in the housing market. The yuan has appreciated against the USD in recent weeks. Since the start of 2012, the yuan has gained about 1% (Chart 9).
Key data Percentage change

FRIDAY 15 JUNE 2012 Andreas Johnson SEB Economic Research +46 8 763 80 32 andreas.johnson@seb.se

2010 2011 2012 2013 GDP* Inflation* USD/CNY** 10.4 3.3 6.59 9.3 5.4 6.29 8.1 3.2 6.20 8.4 3.5 6.05

* Percentage change. ** End of period exchange rate. Source: National Bureau of Statistics of China, Reuters, SEB.

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