Q1 2021 China Macro Data Recap

China’s headline GDP growth surged to 18.3% y/y in comparison to last year’s COVID-related contraction, but sequential quarter-on-quarter momentum and industrial output slowed beyond market expectations. March credit growth disappointed and tipped the credit impulse into negative territory, suggesting weaker cyclical activity ahead in the second half of the year. Both retail sales and PPI growth were surprisingly strong in March, and the resilience of the export manufacturing sector remains a key area to watch in the coming months.

Posted April 20, 2021
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Steel in the Crosshairs of Carbon Emissions Goals

Steel furnace operating rates fell to record-low levels last week despite the arrival of the peak season for construction, which should have boosted steel output. In contrast to the previous round of “supply side structural reform” initiated in 2016, local governments are leading this round of production restrictions in an effort to compete with one another to comply with Beijing’s high-level carbon emissions reduction targets. The sharp recent contraction in supply has sent steel product prices to record highs, widening steelmakers’ profit margins and fueling stronger producer price growth. However, continued weakness in household consumption and incomes should limit the passthrough to consumer prices.

Posted April 20, 2021
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Shadow Banking Under Pressure as Households Search for Yield

One of the most significant anomalies in China’s recovery from the COVID outbreak has been the anemic pace of household and consumer spending. An unexamined piece of this puzzle is household asset allocation preferences, which have meaningfully shifted, with PBOC survey data indicating households are reducing spending to try to accumulate wealth through higher-yield investments. Their preferred investment vehicles have changed from shadow banking products such as wealth management products (WMPs) and trust loans, toward equities and fund management firms, in part because the implicit guarantees on shadow banking products no longer appear solid. This shift is positive for the equity market in the long term, but also will bring more volatility. More defaults and credit events on shadow banking products are likely as those channels face new regulations and tighter liquidity conditions.

Posted April 9, 2021
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