China Macro: April activity data suggest recovery still unbalanced – China’s economic activity data for April were published earlier today. The annual growth numbers are still to a large extent impacted by strong base effects from last year.

Industrial production continues to steam ahead, growing by 9.8% yoy (consensus: 10.0%, March: 14.1%) and by 20.3% yoy in the first four months of this year. Fixed investment was reported at 19.9% yoy ytd (consensus: 20.0%, January-March: 25.6%).

In annual terms, private investment is growing faster than state-led investment so far this year, but that also reflects the bigger shock from the Covid-19 crisis one year ago. Meanwhile, retail sales growth came in weaker than expected at 17.7% yoy in April (consensus: 25.0%, March: 34.2%), with the total value of retail sales contracting by 6.5% mom.

These monthly data can be volatile and impacted by seasonal effects, so one should be careful in jumping to conclusions. This weakness may indicate a switch in consumption to services, not fully captured by retail sales. Meanwhile, the unemployment rate (surveyed jobless rate) dropped further to 5.1% (consensus: 5.2%, March: 5.3%) and is now slightly below the pre-corona level (December 2019: 5.2%).

All in all, the April data suggest that China’s recovery from the pandemic shock is still a bit unbalanced. The industrial sector and investment are profiting from strong external demand and property sector strength, while retail sales are showing renewed weakness.

Meanwhile, China’s credit cycle has already started turning – In the first half of 2020 China eased monetary and fiscal policy in response to the Covid-19 shock, although the support was limited compared to the stimulus packages in developed economies and also compared to the credit bazooka that was rolled out during the global financial crisis.

Acceleration in total lending growth last year was not only modest, but also short-lived. What is more, with the economy quickly normalizing and the leverage ratio rising again, since the second half of last year Beijing has changed course and put financial de-risking at the forefront again.

The government aims to keep credit growth equal to nominal GDP growth this year and has asked banks to keep lending under control. All in all, taking into account (local) government bond issuance as well, the credit impulse has started to turn since late 2020.

We expect the trend of slowing credit growth to continue in 2021, although we do not foresee sharp policy U-turns (certainly not in the run-up to the CCP’s centennial on 1 July). Beijing’s more hawkish stance is also visible in tightening property market regulation and a renewed crackdown of shadow banking including fintech firms and online platforms.

What is more, the rising number of state-owned firms’ bond defaults shows that Beijing supports the fading of the implicit guarantee framework. At the same time, we expect the government will remain careful to keep contagion risks in check to mitigate overall financial stability risks.

China’s credit cycle has turned

% yoy                                                                      12-m change

Source: Bloomberg, ABN AMRO Group Economics