What hap­pened:

April indus­trial pro­duc­tion growth slowed significantly;

April indus­trial pro­duc­tion (IP) growth fell to 13.4% yoy (our fore­cast: 15.0% yoy, mar­ket con­sen­sus: 14.6% yoy), down from 14.8% yoy in March. Month-on-month (mom) growth fell to –5.2% mom s.a. ann. in April, down from 20.2% mom s.a. ann. in March. How­ever, the National Bureau of Statistic’s (NBS) ffi­cial esti­mate of mom IP fell much less from 1.15% non-annualized to 0.93% ann. (or 14.7% and 11.7% annualized).

…and so did retail sales growth

Nom­i­nal retail sales growth fell to 17.1% yoy in April (our fore­cast: 17.3% yoy, con­sen­sus fore­cast: 17.5% yoy), down from 17.4% yoy in March. Pas­sen­ger car sales growth was a main dri­ver of the slow­down which slowed to 2.5% from 6.5% in March. As car sales typ­i­cally accounts for about 10% of total retail sales, retail sales exclud­ing cars prob­a­bly held up in terms of its yoy growth rate.

But FAI yoy growth rebounded; Asia-MAP score: 2 (1, 2)

January-April fixed asset invest­ment (FAI) growth rose to 25.4% yoy (our fore­cast: 24.9% yoy, con­sen­sus fore­cast: 24.9% yoy), up from 25.0% yoy in the January-March period. The implied growth in April alone is 26.1% yoy, up from 25.1% yoy in March. The rise in yoy FAI could be because of base effects as invest­ment growth started to fall sig­nif­i­cantly in April 2010 amid pol­icy tight­en­ing. Our esti­mated sequen­tial FAI mod­er­ated slightly though the NBS’ offi­cial esti­mate showed a rebound. Given FAI data is sub­ject to sig­nif­i­cantly more data prob­lems than other offi­cial data such as IP, we believe it is not pos­si­ble to make a firm judg­ment on its sequen­tial growth momentum.

CPI yoy came in slightly above expec­ta­tions but CPI and PPI infla­tion mod­er­ated on both yoy and sequen­tial terms

April CPI infla­tion fell to 5.3% yoy (our fore­cast: 5.1% yoy, con­sen­sus fore­cast: 5.2% yoy), down from 5.4% yoy in March. Month-on-month growth fell to 3.2% mom s.a. ann. in April, down from 6.4% mom s.a. ann. in March. Food price infla­tion fell to 11.5% yoy, down from 11.7% yoy in March. Sequen­tial food price infla­tion fell to 6.5% mom s.a. ann. in April, down from 9.2% mom s.a. ann.  in March. Non-food price infla­tion remained flat at 2.7% yoy in April but its sequen­tial growth fell to 2.2% mom s.a. ann., down from 5.0% mom s.a. ann. in March.

Mean­while, PPI infla­tion fell to 6.8% yoy in April (our fore­cast: 7.1% yoy, con­sen­sus fore­cast: 7.0% yoy), down from 7.3% yoy in March. Its sequen­tial growth soft­ened to 0.1% mom s.a. ann., down from 4.8% mom s.a. ann. in March.

Mon­e­tary con­di­tions tight­ened sig­nif­i­cantly

Com­mer­cial banks extended Rmb739.6 bil­lion in loans in April (our fore­cast: Rmb720 bil­lion, mar­ket con­sen­sus: Rmb700 bil­lion), up from Rmb679.4 bil­lion in March 2011 but lower than the Rmb774 bil­lion in April 2010. Out­stand­ing CNY loan growth fell to 17.5% yoy in April (our fore­cast: 17.5% yoy, mar­ket con­sen­sus: 17.4% yoy) from 17.9% yoy in March. The mom; s.a. ann. growth remained low at 10.6%, largely unchanged from 10.4% in March.

M2 growth fell much more vis­i­bly to 15.3% yoy (our fore­cast: 16.0% yoy, mar­ket con­sen­sus: 16.6% yoy) from 16.6% yoy in March. The mom; s.a. ann. growth fell to 3.6%, down from 36.3% in March.

Take­aways:

Activ­ity growth was undoubt­edly weak though there are some uncer­tain­ties in terms of how weak it is: We esti­mate sequen­tial mom s.a. ann. IP growth was a mere 6% in April 2010, in light of this low base, the fall in its yoy growth by more than 1 per­cent­age point sug­gests its sequen­tial growth in April 2011 was sig­nif­i­cantly lower than 6% mom s.a. ann. and likely neg­a­tive. How­ever, the NBS’ offi­cial esti­mate indi­cated April mom growth was still 11%-12% annu­al­ized. Given the NBS has not released his­tor­i­cal data for sequen­tial IP growth and very lim­ited infor­ma­tion in terms of its sea­sonal adjust­ment pro­gram it is dif­fi­cult to  know the rea­son for this large dif­fer­ence. One pos­si­bil­ity is the NBS chose the smoothed seasonally-adjusted series which only reflect trend and cycle (TC in sea­sonal adjust­ment options) but not “irreg­u­lar­i­ties”. If so, the mom would tend to under-state the lat­est changes (we do use this option but only for FAI data because its data is sim­ply too noisy but we believe the qual­ity of IP data is mostly good enough to use nor­mal adjust­ment process which includes “irreg­u­lar­i­ties” which often reflects the lat­est changes at the mar­gin). The NBS has only released mom for the past three months and hence we are not able to prove or dis­prove this sus­pi­cion at the moment. Besides, there are addi­tional uncer­tain­ties because of the adjust­ment to the sta­tis­ti­cal stan­dard at the start of 2011 (pre­vi­ously all indus­trial com­pa­nies with annual sales of Rmb5 mil­lion had to report IP data. This level has been raised to Rmb20 mil­lion) and the NBS’ offi­cial esti­mate sug­gests in 2010 the new stan­dard tends to report a higher growth rate and hence the growth rate has to be adjusted when cal­cu­lat­ing sequen­tial growth but by how much it should adjusted is some­thing unclear because the gap between the two series is not nec­es­sar­ily sta­ble over time. Hav­ing said that, judg­ing from data rang­ing from PMI (both the offi­cial and HSBC) and elec­tric­ity pro­duc­tion (growth fell from 14.8% in March to 11.7% in April), indus­trial growth undoubt­edly had a mean­ing­ful softening.

The mod­er­a­tion in M2 and power short­ages were the likely dri­vers of the slow­down: The M2 slow­down was in turn con­tributed by 1) a mod­er­ate credit tight­en­ing (the amount of newly increased loans was higher than it was in March but con­sid­er­ing the sea­son­al­ity, it was not strong); 2) a mod­er­ate fis­cal tight­en­ing (fis­cal deposits increased by Rmb410 bil­lion, Rmb66 bil­lion more than the Rmb344 bil­lion increase in April 2010. Since these deposits are excluded from M2, the more they increase, the lower M2 tends to be); 3) a pos­si­ble slow­down in FX inflows (though data on FX posi­tions still has not been released so we can­not be sure about this); and 4) pos­si­ble upside dis­tor­tions to March data because of var­i­ous end-of-the-quarter exam­i­na­tions at com­mer­cial banks (though the tra­jec­tory of M2 growth over the past sev­eral months has been closely cor­re­lated with our best esti­mates of the changes in activ­ity growth which sug­gests M2 data is largely reli­able as a gauge of mon­e­tary con­di­tions). In addi­tion, there have been wide­spread power short­ages in the coun­try which put a cap on the pro­duc­tion of heavy indus­trial prod­ucts which is reflected in the larger fall in heavy IP rel­a­tive to light IP. The power short­ages is con­tributed by a num­ber of fac­tors includ­ing the lack of rain­fall which lim­ited hydro-electricity pro­duc­tion and the strong under­ly­ing demand for elec­tric­ity, though prob­a­bly the lack of incen­tives to gen­er­ate elec­tric­ity to min­i­mize losses as a result of high coal prices has capped elec­tric­ity prices.

CPI came in slightly above our and mar­ket con­sen­sus fore­casts, but it nev­er­the­less rep­re­sented a sequen­tial mod­er­a­tion to around 3% mom ann. from around 7% in March. Encour­ag­ingly CPI: non-food and CPI: Hous­ing in par­tic­u­lar has shown con­sis­tent sequen­tial mod­er­a­tion. The main rea­son for the upside sur­prise is down­stream food and espe­cially veg­etable prices did not fall quite as much as the high fre­quency food price indices com­piled with Min­istry of Agri­cul­ture and Min­istry of Com­merce data suggested.

From Gold­man Sachs

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