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Fast Comment ChinaThe slowdown finally sets in

  1. Very weak activity figures in May
  2. Growth slowdown is here
  3. Monetary policy being eased rather than tightened
Very weak activity figures in May
Following a surprising pick-up in growth at the beginning of the year, the weak May activity data suggests that China’s economy is now slowing. Industrial production growth undershot expectations as growth fell from 7.0 percent y-o-y in April to 6.8 percent in May. But since growth jumped in April, the May decline does not look that worrying. However, the slide in retail sales growth from 9.4 percent y-o-y in April to only 8.5 percent against expectations of a slight increase indeed looks bad. Similarly, growth of fixed asset investments slid dramatically, driven primarily by a slowdown in infrastructure investments whereas property investments and investments in the manufacturing sector held up. It is however somewhat assuring that infrastructure is behind the decline. Infrastructure projects remain an important economic policy tool and the slowdown is very likely policy driven, which also means that it can fairly easily be reversed by the authorities, if needed.
Growth slowdown is here
We have indicated for some time now that the slowdown would set in, and it finally looks as if overall growth will indeed slow. As the authorities try to reign in financial risks and dampen shadow banking activities, credit growth is slowing and hurting overall economic growth. Furthermore, measures to dampen the wobbly property market, especially in terms of prices, have not yet been rolled back. Add to this the apparent slowing down of global demand, which will be exaggerated if the trade war escalates.
Monetary policy being eased rather than tightened
Fiscal policy is still being tightened rather than loosened, whereas the direction for monetary policy seems to be changing toward policy easing. The reserve requirement on commercial banks was lowered markedly in late April. Furthermore, the central bank (Peoples Bank of China) refrained from hiking the interest rate it charges on its money market operations following the rate hike from the US Fed, contrary to what it did following the two previous Fed rate hikes.



Bjarke Roed-Frederiksen

Senior Economist

Latin America and China

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