Weakening activity indicators may prompt policy support measures in China

HONG KONG - Monthly activity indicators released by China  today (for January/February combined) disappointed to the downside. Growth of industrial production slowed to 8.6% y/y (consensus: 9.5%);  urban fixed asset investment (year-to-date) came in at 17.9% y/y (consensus: 19.4%), and retail sales fell to 11.8% y/y (consensus: 13.5%).

The data confirms a slowing trend, coming on the heels of sluggish exports, softer inflation, and weaker credit growth. BBVA Bank says it appears that recent Government efforts to curtail domestic fragilities and financial risks by slowing credit growth, and measures to address over-capacity and worsening air quality, may be creating headwinds to growth.

“Given the Government’s 7.5% growth target, we would expect policies, especially fiscal, to turn more growth supportive in coming months,” BBVA says. “Among the available policy tools are an acceleration of public infrastructure spending, maintenance of low and stable interbank rates, and slowing the pace of currency appreciation. Pro-growth reforms such as streamlining public administration and opening state-dominated sectors to private participation are also likely.

“At today’s conclusion of the NPC, Premier Li Keqiang indicated that, while the growth target is still achievable, what matters more is employment, implying that it would be acceptable to miss the target. This underscores the downside risks to our 7.6% growth projection in 2014 as the Government tackles financial fragilities and implements the reform agenda.” www.bvaresearch.com (ATI).