Industrial production slowdown offset by sales of consumer goods

China’s economy remained stable in the first two months of the year, with a slowdown in industrial production offset by a steady rise in sales of consumer goods.

The value-added industrial output of designated large enterprises — with an annual turnover of at least 20 million yuan (US$2.97 million) — grew 5.3 percent year on year in the first two months.

That was a slowdown of 0.4 percentage points compared to December 2018, the National Bureau of Statistics data showed on Thursday, citing the Chinese New Year as a major factor that dragged it down.

On a month-on-month basis, industrial output in February was 0.43 percent higher than the previous month.

It is estimated that the industrial production growth in the two months would have been 6.1 percent year on year if distortions from the Lunar New Year holidays were excluded, according to the bureau.

Spring Festival is an important festival in China, and its impact on the production and people's life is not limited to the seven-day holiday. The industrial output, four days before the Spring Festival and about 15 to 20 days after the festival, is very likely to affect the production and operation of enterprises, said Mao Shengyong, the bureau spokesman.

By industry, output growth in the mining sector moderated to 0.3 percent year on year in January-February from 3.6 percent in December 2018, output growth in the utility sector declined to 6.8 percent from 9.6 percent, while output growth in the manufacturing sector ticked up to 5.6 percent year on year from 5.5 percent.

In terms of high-tech products, production of industrial robots saw its decline narrow to 11.0 percent in January-February from 12.1 percent in December, and production growth of new-energy cars improved to 53.3 percent from 15.5 percent.

The service sector expanded 7.3 percent year on year in January-February, flat from December 2018.

Among them, the information transmission, software and information technology service industry jumped 26.5 percent, and the leasing and business service sector increased by 7.9 percent year on year. The growth rates were 19.2 percentage points and 0.6 percentage points higher than the overall national production in the service sector.

Fixed-asset investment and retail sales

Fixed asset investment growth rose to 6.1 percent year on year in January-February from 5.9 percent in December 2018, but fell from the 7.3 percent year-on-year growth in the fourth quarter last year.

"Although the pace of recovery is slightly slower than we expected, the uptrend is well in place and likely to continue on the back of special local government bond issuance and approval of FAI projects in the coming months," the Australia and New Zealand Banking Group noted.

Property investment growth jumped 11.6 percent, lifted by investment growth in eastern and western China. However, funding sources had increased a mere 2.1 percent year on year during the same period, with a decline of 1.5 percent in self-raised funds.

These suggest a likely rise in developers’ credit risks in the near term, said Betty Wang, a senior economist at ANZ Group.

"However, with expected loosening measures in 2019, we will continue to see limited downside risks in China’s property investment," Wang said.

Retail sales growth remained sluggish at 8.2 percent year on year in January-February, unchanged from December. This was weaker than the 8.3 percent growth in the fourth quarter and the 9 percent full-year growth in 2018.

The recent equity market rally could boost confidence in consumption to a degree, but the positive wealth effect could be quite short-lived due to the volatile nature of China’s stock markets, said Nomura.

"Although individual income tax cuts may also provide some support for consumption, it may be partly offset by a strengthening in tax collection and falling income growth rates. We remain cautious on the consumption outlook, given the ongoing growth slowdown and already-high household debt burden," said Lu Ting, chief China economist of Nomura.

Looking forward, "we still expect the growth slowdown to worsen further in the next several months and revise down our GDP growth forecast for the first quarter to 6.2 percent year on year, while maintaining our below-consensus forecast of 5.7 percent for the second quarter," Lu added.