China’s stimulus is kicking in, but it's too soon to call victory

Today’s Credit Impulse update focuses on China and the latest PMI factory activity print that was released yesterday. There is some seasonality in there but, as a matter of fact, it showed the best delta to the upside since 2009, at 50.5 in March. Such a strong rebound was a surprise and was widely interpreted as a sign that China’s recovery is much faster than the consensus expected. I don’t share this view. 

Let me elaborate. I am not saying that this data is unimportant, but looking at other indicators that were published the same day, it seems like we are still far from stabilisation:

– South Korea exports were at minus 8.2% YoY in March, and exports to China at minus 15.5% YoY
– Japan Tankan March sentiment of larger manufacturers is at a 6-year low 
– Germany manufacturing PMI was at its lowest level since July 2012 at 44.1 last month

What is even worse, February machine tool exports from Japan to China fell 50%.

And today, March global manufacturing PMI output reached a 33-month low at 50.5, suggesting that global production growth will keep weakening in the coming months. 

Domestic Chinese data also confirm that the slowdown is not over. I have listed below some of the main fiscal measures undertaken recently by the authorities. The amounts are converted from CNY to EUR for better understanding of the extent of the stimulus. Along with monetary stimulus, the measures are starting to bring some support, as shown by the acceleration of investment growth momentum, but it is still not fully convincing looking at retail sales growth (even excluding autos). Overall, Q2 economic activity is likely to be soft again.

Fiscal measures to support the economy

– Increase in spending of 6.5% in the 2019 budget
– Decrease of the two VAT thresholds, respectively from 16% to 13% and from 10% to 9%
– Lower taxes for SMEs and start-ups
– Public security expenditure of around €23bn in 2019
– Investments in the railway sector for €105bn
– Investments in road and river networks for €236bn
– Purchase subsidies for EV to support the automotive market
– Decrease by 16% of the social security costs paid by companies
– Higher budget deficit for Chinese provinces to €122bn vs €13bn last year
– Bond issuance target by Chinese provinces at €282bn vs €177bn in 2018

What do LEI say?

China LEI are still broadly weak. Output indicators are oriented south, especially traffic freight, while electricity production is stabilising. In the credit space, we have more signs that the fiscal and monetary pulse is working. M1 growth has started to accelerate, at 2% YoY in February, and TSF growth has slightly moderated the same month but it reflected a normalisation after a strong increase in January.