Economic data coming out of China does not look good. At the very least, they’re collectively saying that Chinese economic activity is slowing at a staggering pace.
China’s Dismal Factory Output, Retail Sales, and Investment Miss Estimates
April’s factory output increased 5.9% year-over-year, beating March’s 5.6% increase. However, the growth is slightly less than the six percent expected by analysts. Moreover, the 5.6% reading in March was the lowest since November 2008. (Source: CNBC, May 13, 2015.)
Retail sales in April increased 10% from the same period a year ago. It was lower than the anticipated growth of 10.5% for the month. It was also smaller compared to March’s 10.2%. China’s retail sales over the last year have been dwindling.
Fixed asset investment rose 12% year-on-year, short of the analyst expectation of 13.5% growth. Fixed asset investment includes spending on infrastructure, factory equipment, and construction. As one of the main drivers of the Chinese economy, the slowdown in its growth can put brakes on the growth of the global economy. Fixed asset investments in China have also faced headwinds over the last year.
Going forward, weak readings should be expected, as the People’s Bank of China (PBOC) just lowered its benchmark interest rate for the third time in six months.
Borrowing Cost Still High
Despite the PBOC’s continuous efforts in lowering interest rates, the real interest rate in China is still high. Although the one-year benchmark lending rate is lowered to 5.1%, producer price declined 4.6% in April. Producer prices have been falling for 38 consecutive months.
The real interest rate is the nominal interest rate minus inflation. From a producer’s perspective, prices are declining; so inflation is negative. When you add them up, the real interest rate is around 10%.
In March, the weighted average lending rate for non-financial businesses was 6.8%. A high lending rate has resulted in difficult situations for capital-intensive industries like manufacturing. To facilitate growth, analysts are expecting the Chinese central bank to make further interest rate cuts and lower the reserve ratio.
Data also shows weakness in China’s exports and imports. Exports dropped 6.4% in April year-over-year. Imports plunged a more dramatic 16.2%. This indicates weak demand in the Chinese economy.
Weak demand is not just causing port activity to slow down; manufacturing is affected as well.
In the HSBC’s report on China’s manufacturing sector, the Purchasing Manager’s Index (PMI) was down to 48.9 in April—the lowest reading in the previous 12 months. Any reading on the PMI below 50 means there’s a contraction in the manufacturing sector. (Source: HSBC/Markit, May 4, 2015.)
As the world’s second-largest economy, the slowdown in China will be felt around the world. For instance, many U.S. corporations have operations in China. Weak demand will hinder their growth prospects. China also does a lot of manufacturing work for foreign companies. If China’s economy continues its lackluster performance, global economic growth will be limited.