East Asia Econ

The optimistic interpretation for the weak May PMIs is this is a soft patch that was inevitable after the strong Q1 bounce. But for manufacturing at least, that isn't especially persuasive, and the broad-based weakness of output prices is a warning of more more fundamental challenges.

If Japan's economic problems were about debt and deflation, then China is facing similar challenges. The one difference is the competitiveness of China's exporters. As a result, China is likely to see falling rates, but currency strength could be more of an issue for China than it was for Japan.

It has been a quiet few days for China data. What has emerged continues to look bearish, with the move of money into time deposits continuing, industrial prices falling more quickly, and corporate profits weakening.

Data inconsistencies are commonplace in economic analysis, and not just in China. Even so, that it is possible to claim that in the same month Chinese retail sales grew by 1%, 5% or 60% is problematic. We remain sceptical that the economy has recovered as much as official data suggest.

That property price inflation eased in April is no surprise, given the softening of all other real estate indicators this month. But it is still worth noting, especially given other data showing mortgage rates falling to new record lows. If policy can't turn the market around, then what can?

China's official activity data for April were soft, with IP, FAI and property construction contracting MoM, and retail sales slowing. Early indicators for May don't suggest a turnround, with the fall in industrial prices accelerating so far this month.

After a strong start to the year, April credit growth was weak. The apparently short-lived credit cycle is reminiscent of 2020, but three years ago and the economy was boosted by exports and property. Real estate is much weaker this time, with mortgage lending collapsing again in April.

That China is in deflation – both PPI and CPI fell MoM in April – while the rest of the world struggles with inflation really is a remarkable outcome. Underlying inflation isn't quite that weak: core CPI inflation remains around 0.7% YoY. But still, there really isn't upwards pressure on prices.

China's exports weakened a bit in April from the heady level of March, but remained strong relative to usual indicators of export demand. Imports remain weak, a reminder of the softness of the domestic industrial cycle. The trade surplus continues to widen.

The recovery in tourist numbers over the May holiday was impressive, and the Markit PMI was strong again. But our impression remains that the pickup in overall activity is underwhelming.

We've been more cautious on the outlook than the consensus, and remain so after the official April PMIs. The one indicator that gives us pause for thought is the strength of the construction PMI, but that would be more convincing if there were broader signs of the property cycle really lifting.

We had started to become hopeful that the property market was picking up, but transactions have fallen back down again in April. Other indicators for the industrial cycle also look bearish, with output prices weak, and profits still falling.

The sell-side and media consensus seems to be that the GDP data show clear recovery. Investors seem less convinced. We'd guess this reflects data discrepancies which undermine the headline message of recovery, and need to be resolved to have conviction that the cycle is gaining momentum.

Detailed GDP data show growth in Q1 being driven by consumption and investment, with zero contribution from net exports. Hospitality grew almost 15% YoY That's not as big a bounce as in 2020, but the base effect is smaller, and indeed, the government has revised up Q422 growth from zero to 0.6% QoQ.

The headline data for Q1 look better, but the details were much weaker. While YoY growth in retail sales rose over 10%, in MoM terms it fell back, with other data showing household income growth in Q1 remaining very weak. At best, the recovery remains fragile.

Exports in March were so strong, and the trade surplus so big, that we continue to think they must have been boosted by one-off effects. But it is worth asking the implications if that assumption is wrong, because if it is, it would matter for growth, the currency, and protectionism.

Chinese property prices rose in March. The increase was modest, but with transactions and mortgage lending also picking up, it is looking more likely that the property cycle really has turned. That in turn improves the prospects for the overall economy.

Exports – and the trade surplus – surged in March to record highs. That is remarkable, and while we need to do more digging, for now, we assume it reflects residual LNY seasonality. If not, it is tough to know how the ROW will cope with China's export competitiveness.

China's credit and monetary data for March weren't as strong as earlier in the year, but remained firm. The details, including both the structure of credit and a long-awaited bounce in mortgage lending, were also encouraging.

Inflation slowed again in March. The floor is probably close, but there is no sign of any strong rebound. The risk for the real economy is that real interest rates are rising and so financial conditions tightening. It is likely that the PBC cuts nominal interest rates.

China's economy is....confusing. There is a recovery, with property sales now lifting. But different indicators show households remain financially cautious. That could just be a timing issue, but until it changes, we would be in turn be cautious about the strength and sustainability of the recovery.

The PBC's Q1 surveys paint a mixed picture. We'd continue to expect the government to have to offer more policy support for the recovery. But the overall tone of the surveys is a bit better than we were expecting, and at the margin makes us more comfortable about the outlook.

The PMIs across all sectors were strong in March, painting a better picture of the 3M outlook than suggested by the weakness of financial markets since January. But the PMIs still don't give us huge conviction that any short-term recovery can be sustained through 2H23.

There are signs of a lift in infrastructure and property. Real estate faces the drag of structural weakness in consumer sentiment. So China's economy isn't off the races. But risks around the economy and markets have become more balanced.

On a sequential basis, both imports and exports rebounded early in 2023, with the rise in imports particularly strong. There's probably some downside left in YoY trends for both, but the floor should be close, particularly for exports, with some rebound thereafter.