China most recent economic indicators continue to show growth momentum is weakening
April saw both the official and the HSBC PMI weaken. The HSBC PMI fell further in May to 49.6, below the 50 mark for the first time in seven months. The official manufacturing PMI, which will be published by the end of the week, is likely to drop below the 50 mark as well.
However, we should not dramatize the situation: we have seen with previous episodes of the PMI falling below 50 that GDP growth was accelerating at the same time.
Disappointing economic momentum is not only due to the impact of tightening measures (anti-corruption, property). Consumption has moderated on the back of slower wage growth. Despite the focus on consumption, the main engine for China’s GDP growth remains infrastructure investment. Most recent economic indicators showed that, despite a rebound in property activity, fixed asset growth slowed to 20.1% YoY in April due to deceleration in infrastructure investment. In total, it led to slower industrial production growth of just above 9% YoY in April.
China has now come out of the past 15 golden years of growth. The current economic structure lacks strong growth drivers for the medium and long term and reforms are therefore needed.
However, we do not expect the Chinese authorities to respond with new stimulus measures. New leaders seem to be ready to accept lower growth while focusing on reforms. However, the policy response to the weakening economic outlook remains uncertain.
The current accommodative financial conditions, which led to a surge in credit growth, are likely to continue despite the increased vulnerability of the financial system. The economy has become addicted to debt: total debt has more than doubled since 2008; new debt added in past four years is equal to 110% of GDP. New debt equals almost three times nominal GDP growth since 2009.