China reaction: Unbalanced growth with consumer lagging, more support on property market

Bright spot in the industrial sector

China's industrial production showed remarkable resilience in April, up 1.0% mom and 6.7% yoy (March: -0.1% mom, +4.5% yoy). This exceeded market expectations of 5.5%. Share-holding enterprises experienced the most significant growth, rising by 6.9% yoy, while private and foreign enterprises also saw notable improvements, with increases of 6.3% and 6.2% respectively. State-owned enterprises grew comparatively softer, expanding by 5.4% yoy. Sector-wise, manufacturing led the way with a robust 7.5% increase in industrial production in April. Notably, automobile and electronic equipment manufacturing sectors surged by 16.3% and 15.6% respectively. High-tech manufacturing overall posted impressive growth, reaching its highest performance since March 2022, increasing by 11.3% in April.

The strong industrial performance in April was largely driven by robust fixed asset investment at the beginning of the year. Continued solid performance in private and foreign enterprises signalled a potential revival in investment outlook for these sectors, which have been lagging. This momentum in April aligns with Beijing's strategic focus on advancing the manufacturing sector up the value chain. However, concerns about overcapacity, particularly in high-tech manufacturing, have emerged amidst persistent PPI deflation and escalating trade tensions. On the positive side, the solid industrial output bodes well for the labour market outlook, especially for migrant workers who constitute the primary workforce in the manufacturing sector. As such the unemployment rate fell to 5.0% in April, from 5.2%.

Subdued consumption in April points to fragile momentum

Retail sales in April fell short of expectations again, underscoring the delicate state of private consumption. With an increase of just 0.0% mom, 2.3% yoy, retail sales in April were well below the market forecast of 3.7% yoy, marking the slowest pace since the beginning of 2023. Across the board, consumption showed sluggishness, with goods sales growing by 2.0% (March: 2.7%) and catering decelerating to 4.4% growth in April, down from 6.9% in March. While home appliances sales saw improved performance compared to the last two years, with a 4.5% increase in April, automobile sales continued their decline, dropping by 5.6% from March's 3.7% decline.

The soft consumer figures in April underscore the lack of progress in the household sector. Although Beijing announced a time-limited trade-in programme for clean automobile purchases in late April, its impact has yet to materialise given the continued contraction in auto sales. On a positive note, the robust growth in domestic tourism during the Labour Day holiday (1st–5th May) offers hope for May's consumption figures.

Investment slows down following strong Q1 performance

Fixed asset investment showed signs of deceleration in April, with a growth of 4.2% yoy in the first four months of the year, down from 4.5% in Q1. Monthly growth estimates suggest a further decline to around 3.6% in April, compared to 4.7% in March. Investment in manufacturing capex and infrastructure remained the main drivers, albeit at a slower pace, increasing by 9.7% and 6.0% respectively from January to April, with estimated single-month growth of 9.3% and 5.1% in April.

Following its role as a growth engine in Q1, investment tapered off in April, as anticipated after the release of record low total social financing figures for April. While capex investment in manufacturing continued to be robust, echoing the strong performance of industrial output, efforts to shore up investment in infrastructure appeared to have stalled in April. This slowdown aligns with the sluggish issuance of government bonds so far this year. Beijing has initiated the issuance of the RMB 1 trillion ultra-long-term treasury bond and called for faster issuance of local government special bonds, of which only RMB 770 billion has been issued by the end of April out of the RMB 3.9 trillion quota for the year. Accelerated bond issuance could potentially stimulate credit demand in the near future, though the impact on investment may take some time to materialise.

Exploration of direct government intervention in housing inventory amid continued price decline

Property prices continued to fall in April, with declines observed in both primary and secondary markets, dropping by 0.6% and 0.9% mom, respectively. Annual figures show a more pronounced decline, with prices in the primary market falling by 3.5% and the secondary by 6.8% in April (March: -2.7% and -5.9% respectively).

On the back of April’s release, Beijing provided more policy easing, with the reduction of down payment ratio floor nationwide by 5ppt to 15% for the first home and to 25% for the second home; the removal of residential mortgage rate floors; reduction of interest rate on housing provident fund loans by 25bps. More significantly, Beijing called for local government to absorb commercial housing inventory for conversion into affordable housing. This echoes the news earlier this week, where Beijing is reportedly exploring additional policy measures. The proposed initiative involves local governments directly purchasing housing inventories from developers and converting them into social housing, with financial backing from large commercial banks. Several local councils (Lin’an district in Hangzhou and Nanjing) have already begun soliciting sales proposals from property developers, suggesting that local governments may spearhead efforts to address the current turmoil in the property market. However, while local governments may take a more direct role, the central government possesses greater financial resources and political leverage to effectively stabilise the market. With a larger balance sheet and lower leverage ratio, coupled with the ability to deploy fiscal and monetary tools, Beijing is better positioned to support and achieve desired outcomes. Implementing such a policy could strain the financial conditions of local governments and raise concerns about future debt risks.

The specifics and feasibility of this policy are still under discussion, but any developments warrant close attention, as they could have significant implications, both positive and negative, not only for the property market but also for the overall economy and its outlook.