China's IP growth recovered from 5.6% yoy in March to 5.9% yoy in April (consensus: 6%; SG: 5.8%). The seasonally adjusted mom rate bounced back by a reasonable degree from 0.3% to 0.6%. Export growth showed a similar pattern, recording a strong mom growth rate of 22% (the best rate so far for an April) but at -6.4% undershooting the market's high yoy expectation (consensus: 1.6%; SG: -5.8%). The consensus estimates seemed overly optimistic. The pickup in IP and export growth confirmed that part of March's weakness was temporary, but momentum in the industrial sector remained lacklustre entering Q2.
The most worrying data related to fixed-asset investment (FAI). The yoy growth rate slid from 13.2% to 9.4%, the lowest rate ever. The deceleration was broad based, but mining and construction were particularly feeble, contracting by 12.9% yoy (-5% yoy in March) and 23.9% yoy (+16.1% yoy in March) respectively. While the mining sector's woes had been anticipated, the sudden loss of speed by construction FAI confirmed one of our biggest concerns: the rapid growth of infrastructural investment is unsustainable when there is a prolonged downturn in the housing market.
Infrastructure FAI grew 15.4% yoy in April, down significantly from over 20% yoy in the previous three months. The impact of fiscal reform is most likely to be negative for infrastructure investment, as local governments will find it more difficult to boost off-budget funding despite better terms on existing debt, argues Societe Generale.
The muchhyped public-private partnership, as expected, has so far seen muted interest from private investors due to low expected returns and policy uncertainty. Furthermore, land sales have contracted 30% yoy year-to-date, greatly intensifying funding pressure on local governments. Housing sales did show some improvement, registering the first positive yoy growth rate (+7%, up from -1.6%) in 16 months. This was partly due to a base effect, but housing policy easing, including the relaxation of mortgage rules and tax breaks, certainly helped as well.
However, property investment, which matters more for economic growth, has yet to follow, slowing to 0.5% yoy in April from 6.5% yoy in March. That was the second-slowest rate of growth ever. The cause was evidently the tight funding conditions faced by developers.
