China on Friday released activity data for December as well as quarterly and full-year GDP numbers, giving the market a comprehensive health check on the world’s second-largest economy at a critical juncture.
Much to the delight of already bullish market participants, the numbers are solid across the board.
Industrial production rose 6.9% YoY last month, well ahead of the 5.9% consensus was expecting, and better than the most optimistic estimate (6.5% was the top end of the range). Retail sales printed 8% for December, a tick better than the 7.9% estimate. Cumulative fixed asset investment beat too, at 5.4%.
Again, all of that is very solid – at least on a first read.
Q4 GDP avoided a 5-handle, printing 6%, unchanged from Q3’s pace and inline with expectations.
For January through December (i.e., cumulative), GDP grew 6.1%, slightly below the 6.2% estimate, but you’ll note that the “range” was 6.1% to 6.2% .
On Thursday, the PBoC said it will include sovereign and local government debt in the total social financing calculation going forward, a move that could well muddy the waters by blurring the line between fiscal policy and monetary policy. M2 growth came in at 8.7% in December, well ahead of estimates. Hopefully, that suggests demand for credit is picking up.
Beijing has eased policy in gradual fashion in a bid to bolster the decelerating economy. Since August, the PBoC delivered a series of 5bps cuts to the revamped loan prime rate and cut the MLF rate (off which LPR is priced) in November. November’s LPR cut was the third since the de facto benchmark was tweaked over the summer. The PBoC also cut the 7-day repo rate in November for the first time since 2015, and lowered the 14-day rate to match in December during a series of liquidity injections.
The central bank also said financial institutions will cease to use the old benchmark lending rate as a reference for pricing credit starting this month, shifting instead to the revamped LPR. Over the course of the six months from March to August 2020, existing loans will be converted to the new base as well. That amounts to more incremental easing – the revamped LPR is 20bps below the old policy rate.
Also this month, the PBoC cut RRR again, and this week injected billions in liquidity ahead of the holiday, although the MLF rate and OMO rates remained unchanged. Barclays’ Jian Chang is looking for another 100-150bp of RRR cuts.
All of this is an effort to ensure reasonably accommodative financial conditions at a time when defaults are piling up and the central bank has had a difficult time bringing down stubbornly high borrowing costs. On Thursday, the PBoC said the weighted average rate on regular loans dropped to 5.74%. That’s the lowest since 2017 and suggests they are starting to have some success.
In addition to validating the upbeat message from the trade data and PMIs, today’s activity numbers for December build on a sharp rebound in industrial profits, and mark a second consecutive month of improvement. Activity data was solid for November as well, making December’s encore look like the beginnings of a trend.
Fingers crossed on that, although we would note (again) that the “Phase One” trade deal leaves most of the existing tariffs in place. In all likelihood, there will be further tension between the Trump White House and Beijing – it’s just a matter of how long the current truce lasts before the inevitable irritated tweet that starts with “For many years, China has been ripping America off…”