People buy fruit at a farmer’s market on May 11, 2024 in Lianyungang, Jiangsu province, China.
VKG | Visual China Group | Getty Images
BEIJING – China’s economy is heading into the second quarter of the year and some indicators point to sluggish growth ahead unless the situation changes, raising expectations for monetary easing.
The National Bureau of Statistics is due to release data on retail sales, industrial production and fixed investment for April on Friday. Analysts polled by Reuters on Tuesday expected a slight increase from March.
On the same day, China plans to release its first ultra long bond — 30 years into the future — as Beijing launches a previously announced program totaling 1 trillion yuan ($138.25 billion) to allocate funds for major strategic projects. The Ministry of Finance did not specify what the first tranche will be used for.
Part of the weakness speaks to the truly sluggish demand in China at the moment.
“With bond issuance running until November, it is likely that some of the proceeds (and therefore the benefit to the economy) will only be spent in the first half of next year,” Louise Loo, lead economist at Oxford Economics, said on Tuesday.
The firm expects economic data released this week to show a “softening in economic momentum”, supporting its forecasts that the central bank will cut rates by the end of June.
The central government’s bond program comes amid a persistent housing shortage while businesses and consumers remain largely conservative on spending.
The People’s Bank of China released new lending data for April over the weekend, which showed a sharp fall in demand, with some figures being the weakest in at least two decades.
![McNeil: Real estate is still an overhang for China's economy](https://image.cnbcfm.com/api/v1/image/107413823-17155968472ED2-REQ-051324-WEX-Mcneal.jpg?v=1715596846&w=750&h=422&vtcrop=y)
Analysts at Goldman Sachs and other companies were quick to point out that the month’s figures were impacted by changes in the way official data is calculated, as well as a tightening of policies on loans used for financial purposes rather than for business expansion.
“Some of the weakness suggests there is really sluggish demand in China at the moment,” Hui Shan, chief China economist at Goldman Sachs, said in a note on Sunday.
Outstanding Chinese yuan loans rose 9.6% year-on-year in April, matching the pace of March and the lowest since records began in 1978, according to official data available through Wind Information.
Business demand for loans is falling
The number of new bank loans to businesses and government agencies fell sharply in April compared with March, as did the number of new loans to households, according to official data available through Wind Information.
What worries Clocktower Group analysts is that the 12-month moving average for both categories of new loans has begun to decline for the first time since the 2008 financial crisis.
“If the public sector does not support credit growth in a timely manner, there will likely be a sharp slowdown in future growth as economic agents are forced to cut consumption and investment to meet their debt obligations,” the company said at the end of the report. April.
According to a CNBC analysis of data obtained through Wind, the new category of bank loans, including business, saw slight growth in April compared with March on a 12-month rolling average, while new loans to households fell during that time.
The data showed that new business loans were still much higher than in 2019, although household lending fell below that level.
A study by The China Beige Book in April found that corporate borrowing fell due to the services sector, while industrial demand increased. The overall decline came despite more loan approvals and lower interest rates, making loans cheaper.
M2The money supply, which includes cash, cash equivalents and certain deposits, rose 7.2% in April from a year earlier, with the slowest pace on record dating back to 1986, according to official data available through Wind Information. year.
Less emphasis on credit expansion
“Looking ahead, new RMB and M2 loan growth may gradually slow as the PBOC has highlighted the weakening link between economic growth and credit expansion,” Goldman analysts said in a separate report on Sunday, citing the central bank’s forecast. quarterly monetary policy report released on Friday.
“We still expect two more RRR cuts and one policy rate cut before the end of this year,” they said.
RRR refers to banks’ reserve requirements or the amount of cash they must hold on hand. PBOC Governor Pan Gongsheng told reporters in March that there was room for further reductions in reserve requirements.
![Macroeconomic situation in China continues to point to overall 'band-aided' market, says JPMorgan](https://image.cnbcfm.com/api/v1/image/107413743-17155713421715571340-34503314808-1080pnbcnews.jpg?v=1715571342&w=750&h=422&vtcrop=y)
“April credit data was disappointing, but this was largely due to regulatory changes rather than a sharp deterioration in underlying demand,” Macquarie chief China economist Larry Hu said in a report.
“Politicians don’t want a credit-led economic recovery again. Instead, they are happy to rely on exports and new energy sectors to drive growth, at least for now,” he said. He expects exports to continue growing at 5% this year, while noting that the auto sector has done well.
China’s exports have held up despite rising trade tensions. Data released last week showed exports rose 1.5% year on year in April, in line with expectations, while imports rose much more than expected.
Separate data released over the weekend showed modest growth in consumer prices in April. But the price level at factories continued to decline.
But real estate, which once made up at least a quarter of China’s economy, remains a headwind even as more cities ease purchasing restrictions.
Real estate sales are increasingly shifting to the secondary market, meaning developers are not getting much benefit in a market that is still “searching for a bottom,” S&P Global Ratings said in a report early last week.
S&P analysts expect China’s primary housing market to shrink 16% this year.
The Chinese house price index will also be released on Friday. Looking ahead, investors are awaiting a major government meeting scheduled for July for signals on long-term economic policy.
“Separately, the NBK proposes to explore policies that will help digest the existing housing stock and improve the supply of new housing to stabilize the real estate market,” Morgan Stanley analysts said.
“We think this echoes the message from the recent Politburo meeting regarding the real estate market and shows that monetary policy could potentially be used as part of support measures to help China deal with its significant real estate inventory.”
— CNBC’s Michael Bloom contributed to this report.