Sluggish activity indicators affirm China’s easing cycle not over yet

HONG KONG - China’s National Bureau of Statistics (NBS) economic activity indicators for January-February, including industrial production, retail sales and urban fixed asset investment (YTD) were below both market expectations and their levels of last year-end, indicating that growth deceleration continues despite a number of recently enacted monetary easing measures, such as January’s cut in the Required Reserve Ratio (RRR), February’s interest rate cut and other unconventional measures, reports BBVA Bank.

“That being said, the disappointing prints of these economic activity indicators have made this year’s economic prospective look dimmer. Without further easing measures on both monetary and fiscal fronts, more investors will put a big question mark on the official 7.0% growth target for 2015, just announced at the opening session of National People’s Congress (NPC),” BBVA says.

“Nevertheless, the authorities are still equipped with an ample arsenal of policy options. The headline inflation rate remains tame and the producer price increase stays in negative territory (CPI and PPI were 1.4% y/y and -4.8% y/y in February respectively).

“Authorities could enact more cuts in both interest rates and the RRR to spur domestic demand. Moreover, the lacklustre performance of the property market requires more targetted measures to revive housing demand.

“On the fiscal front, this year’s fiscal deficit budget target (2.3% as announced in the NPC as well) is not bold enough to tally with a 7.0% growth target at such a juncture. The authorities should expand it to around 3.0% to offset the fiscal consolidation effects at the local government level and bolster growth.

“All in all, we maintain our growth projection of 7.0% for this year, with some downside risk.” www.bbvaresearch.com (ATI).