China Update: a swamp of weak economic data for April; light in the tunnel for the Shanghai lockdown; stern warning against private capital.

Growth of Aggregate financing failed to gain traction. 

New aggregated financing fell sharply to RMB910 billion in April (Bloomberg consensus: RMB2,200bn; March: RMB4,653 bn).  The rate of growth of outstanding aggregate financing dropped to +10.2% YoY in April from +10.6% in March and back to the level as in February (Figure 1).  After hitting the growth rate trough in September last year, aggregate financing hovering between 10% and 10.5% and failed to gain traction to break to the upside despite numerous government rhetoric as well as effort to kick-start faster credit creation. New RMB loans slumped to RMB645 billion (Bloomberg consensus RMB1,530 bn; March RMB3,130bn).  New loans to corporate slumped to RMB578 billion from RMB2,480 billion in March. 

Mortgage lending was weak with outstanding mortgage loans contracted RMB61bn from the level in March. Reportedly, the People’s Bank of China (PBoC) and the China Banking and Insurance Regulatory Commission (CBIRC) have been calling on banks to lend to corporate and households but loan demand have been weak and at the same time banks are reluctant to lend as they are afraid of holding the bag when loans turning sour. 

Yesterday, in their latest effort to boost mortgage lending, the PBoC and the CBIRC jointly announced a cut of 20bps of the floor mortgage rates for first-time home buyers to 20bps below the 5-year long-term prime rate (LPR which is currently 4.6%).  In other words, the mortgage floor is effectively reduced from 4.6% to 4.4%.  However, most banks are currently charging a premium to the LPR and the average mortgage rate for first-home buyers is about 5.2%.  In other words, the mortgage rate floor currently is not a binding lower limit on banks mortgage lending anyway.  How much banks will pass on the decline in the mortgage rate floor to first-time home buyers is questionable. Demand for mortgage loans is weak.  New home sales for the top 100 developers plunged to -61.2% and -58.6% YoY in April as more than 40 cities were under various degrees of lockdown or mobility restriction. 

Net government bond issuance fell to RMB391 billion in April from RMB707 billion in March.  The Ministry of Finance has demanded local governments to use up most of the RMB3,65 trillion annual local government special bond (LGSB) quota by the end of June this year.  So far, about RMB1.3 trillion has been issued and the remaining RMB2.35 trillion is required to issued in May and June.  For the LGSB issued in Q1 2022, more than 60% of the proceeds was designated for infrastructure investment. 

When setting its policy 1-year Medium-term Lending Rate today, the PBoC kept it unchanged at 2.85% despite some analysts had called for a cut after the weak April credit data.  It is our view that the room for the PBoC to cut rates is limited and the central bank will continue to rely on targeted relending programmes and other quantitative measures to support specific industries or segments of the economy. 

China’s April industrial production, retail sales and fixed asset investment all came at very weak levels. 

April industrial production fell 2.9% YoY (consensus +0.5%, March: +5%).  The weakness was led by the manufacturing sector which declined 4.6% YoY in April.  Passenger car production plunged 43.9% YoY as Shanghai and Jilin, two of the auto production hubs in China, were under lockdown.

The mining sector’s growth also slowed to +9.5% YoY in April from 12.2% in March.  Processed materials such as cement and steel products slumped 18.9% and 5.8% YoY respectively.  

Fixed asset investment came at +2.3% YoY in April, down from March’s 7.1% YoY.  Although the Chinese authorities are pushing for infrastructure construction, the April data in infrastructure investment growth slowed to +4.3% YoY from March’s +11.8% YoY. 

April retail plunged 11.1% YoY (consensus -6.6%; March: -3.5%).  After adjusting for the retail price inflation of 3.4% YoY, retail sales in real term fell 14.5% YoY in April.  Merchandise retail sales fell 31.6 YoY; auto retail sales dropped 31.6% YoY; catering services fell 22.7% YoY. 

Shanghai is expected to lift the lockdown in June.  Shanghai’s Covid situations have improved further with 938 new cases for Sunday, the first time falling below 1,000 since March 23.  It was also the second day that the municipality reporting no new cases outside quarantine.  Shanghai is gradually allowing some stores to open for business and passenger cars to travel in certain areas.  The municipality expects to gradually resume public transportation services from May 22.  Starting from today train services and air flights to and from other Chinese cities is gradually resuming services.  The Shanghai government expects that the lockdown will be completely lifted in June. 

Qiushi Journal published President Xi’s stern warnings against predatory behaviors of private capital in a speech he made in December last year. 

Quishi Journal, a longstanding mouthpiece of the Chinese Communist Party (CCP) publishes today in its portal excerpts of a speech which President Xi made in the CCP’s Central Economic Working Conference in December 2021.  The excerpts selected to publish today extended substantially the coverage on the importance of three-tier income redistribution and regulating private capital which had occupied much less space and with less details in the original press release of that December meeting.    Today’s piece has 674 words in stern language to warn against the negative impact of private capital while the original press release in December had only 186 words in more moderate tone in mentioning private capital. 

As discussed in our previous note, the CCP is dealing private capital with a red light-green light game kind of regulatory approach for the latter to move forward on green light but to stand still on red light.  It is one of the CCP’s tenets that private capital is in contradiction with the communist ideal but a necessary convenience in the socialist economy.  In today’s piece, “President Xi warns against “lax regulations’ in recent years over private capital, and the emergence of “disorderly expansion, wanton manipulation and excessive profiteering” of private capital.  He further emphasizes the importance of “not letting capital barons to do whatever they want” and demands for “stopping private capital’s savage growth, monopolistic behaviors, excessive profits, price rigging and improper competition.”  

In the way of working of the CCP, articles like these in mouth pieces such as Quishi Journal and the People’s Daily are often selected carefully to serve specific political purposes.  Today’s piece should caution analysts and investors who have recently developed, in our opinion, too much optimism on a fundamental reversal of China’s clampdown on internet companies.  Relaxation may be, a reversal of the trend of tightening regulation is unlikely. Tomorrow, some leading technology executives including the founder of internet security company Qihoo 300’s will attend a consultative session of the Chinese People’s Political Consultative Conference (CPPCC) to discuss digital security.  Some analysts are speculating if there will be positive signals from senior officials who attend the CPPCC session on relaxing the clampdown on internet platform companies.  We suspect that the CPPCC, which is purely consultative, will not be the platform for conveying important policy messages.