Uncertainty Persists

Fixed asset investment growth slowed significantly in April, rising by 10.1% y/y, down 0.6 pps from Q1. Value added for major industrial firms was likewise weak, at 6% y/y, down 0.6 pps from March -- and a break from the previous recovery. We expect private investment to pick up after industrial output shows clear signs of rebound – rising above 10% y/y, for example. More actions need to be taken to boost growth, and the Chinese government is advocating structural reforms, by encouraging more innovation. But we hope China does not deviate too much from its old path of investment.

Retail sales of social consumption goods were up 10.1% y/y in nominal terms, down 0.2 pps from Q1. Exports in dollar terms fell -1.8% y/y, up 7.8 pps from Q1. Imports fell -10.9% y/y, 2.6 pps more than in Q1. Both indicators are still in the negative zone, though narrowing to the zero line.  We do not expect trade to improve in the short term.

Prices are stabilizing, with CPI up 2.3% y/y in April, flat on March. In April, the ex-factory price index rose 0.7% m/m and fell -3.4% y/y. PPI rose 0.6% m/m and fell -4.4% y/y. The two indices’ y/y decreasing magnitudes fell by 0.9 and 0.8 pps, respectively.

M1 rose 22.9% y/y, up 0.8 pps from March, showing accelerated growth. But other major financial indicators are all declining. The broad money supply, M2, was up 12.8% y/y, down 0.6 pps from March. In April, total societal financing plunged by -28.9% y/y.

The People’s Bank of China made special announcements in response to the decline of financial indicators, emphasizing irregular factors underlying the drops. The Bank stressed that the general direction of monetary policy hasn’t, and wouldn’t, change.

China’s tax system underwent a major shift on May 1st, when the VAT system was extended to all sectors of the economy. Previously, firms paid tax based on their revenue; they’ll now enjoy a large tax reduction. We estimate that business taxes will fall by over RMB 300 billion. But the VAT reform will also generate enormous growth opportunities, especially for mid-sized firms that are mostly private, and will generate more jobs. The government budget won’t suffer, as VAT reform will attract more firms into business, and raise the output of existing firms – which will all increase government revenue.