Bad news is good news as Chinese data slumps

This quarter’s GDP figure was a big test of the reliability of Chinese economic data. The country’s monthly data for January and February was abysmal, and anything better than a matching GDP print for the quarter would have been met by a certain amount of sceptical jeering.

Our own in-house model, for example, suggested that on the basis of the first two months of the quarter alone, a contraction in China’s economy of around 3.5% year-on-year (y/y) seemed warranted, with even this number constrained by the historical tendency of Chinese GDP towards stability.

This forecast left open the possibility of a sharp improvement in March. However, with some quarantine restrictions remaining in place for that month, an immediate recovery seemed highly unlikely.

In the end, the data release was worse even than our model had suggested. Never, though, has the adage applied so often to Chinese data been truer: “bad news is good news”.

There are two reasons for this. The first is that it represents a move towards accepting reality. We have some hope now that Chinese economic data will be more accurate in the future.

The second reason is that, given the government has only recently reiterated its commitment to growth targets, the poor data implies that strong stimulus should be on its way.

It is difficult to see how the target for doubling incomes from their 2010 levels could be met this year, given that full year growth of around 5.6% would be needed, but any attempt to come close will require outsized expenditures.

Higher frequency data meanwhile showed some improvement in March as restrictions were eased.

Industrial production saw a particularly sharp upward trajectory, recording a y/y contraction of only a little more than 1% y/y after a 13.5% decline in the first two months of the year. This suggests there may still be some issues with Chinese economic data, though we think it is also possible industrial production worsens again, along with exports, next month.

Exports also saw a big improvement in March as the backlog of orders from February was cleared, but with the rest of the world now shut down, China’s ports and factories may find it difficult to sustain this momentum.

The smallest improvement in the usual monthly series was in retail sales. In real terms, these contracted 20%, better than the 25.7% contraction previously but clearly still struggling. Anecdotal reports suggest shoppers remain nervous, and we think this is a matter harder to resolve with stimulus cheques. Fixed asset investment, however, still down around 15%, will be easier to revive as soon as workers are released from quarantine. The surge in credit in March paints a very supportive picture on this front. 

Where does this leave our full year forecast? So far we have maintained two forecasts for China; one for the official numbers and another for our own indicator, which we regard as being a closer measure of reality. Tentatively, we think we may now be able to align the two.

Certainly, our previous official forecast of 5% for 2020 looks hopelessly optimistic. Our activity indicator now points us more towards full year growth of a little over 2%, a downgrade from the previous estimate of 3.5% and in normal times an embarrassingly large revision. It is a mark of the uncertainty of the times that this now seems almost unremarkable.

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