Yesterday, China released data on its industrial production and retail sales that showed growth in February cooled more than estimated. Later in the day, Premier Li said that the country’s 7.5% growth goal this year may see a certain degree of flexibility and that the government’s key concerns are jobs and livelihoods. The data and comment led many to speculate that a slowdown may add to chances of stimulus.
 
A research report by Macquarie Equities Research (MER) issued on 13 March however, suggests that while recent data was disappointing, it is too early to call for stimulus. They explain why:
 

Jan-Feb activity data are disappointing, all way below the market consensus. Specifically, industrial production (IP) growth decelerated to 8.6% year-on—year (yoy) in Jan-Feb (consensus: 9.5%) from last December’s 9.7%, suggesting GDP growth in 1Q14 could fall to around 7.2% yoy from 7.7% in 4Q13. However, it is too early to expect high-profile stimulus such as reserve requirement ratio (RRR) cuts, in MER’s view. Rather, Beijing will likely stimulate in 2Q14 when growth could fall below 7%.
 
Weaker-than-expected investment and retail sales: Both MER’s fixed asset investment (FAI) and retail sales forecasts are the lowest ones in Bloomberg survey, and the actual numbers are even lower than MER’s. Headline FAI growth decelerated to 17.9% yoy in Jan-Feb from 18.2% in 4Q13. The slowdown was mainly driven by manufacturing FAI, which slowed to 15.1% in Jan-Feb from 18.5% in 4Q13. With regards to retail sales, the headline growth slowed down to 11.8% yoy in Jan-Feb from 13.5% in 4Q13. Notably, auto sales slowed to 11.5% from 13.1% while growth of jewellery sales fell to 9.3% from 15.1%.
 
Property sector in down-cycle: Property FAI growth declined to 19.3% yoy in Jan-Feb from 19.9% in 4Q13. New home starts slumped 27.4% yoy in Jan-Feb after growing 33.1% in 4Q13. Home sales growth (in value terms) fell to -3.7% in Jan-Feb from 13.7% in 4Q13. The incoming property data are in line with MER’s view that the property sector has entered its 4th down-cycle. For 2014 as a whole, MER expects home sales (in value terms) to grow 10% vs. 26% in 2013. Home prices at national level (measured by 70-city index) could start to drop in 4Q14. That said, a hard-landing for the sector is not very likely, and sales growth might even rebound in 2H14.

Too early to call for high-profile stimulus. A report by Reuters yesterday has sparked speculation on RRR cuts. To be sure, MER does expect the PBoC to cut RRR twice in 2014. However, MER believes it’s too early to call for any substantial policy easing such as RRR cut. Rather, MER expects policy makers will wait for more data points to see how severe the current downturn is, given the volatile Jan-Feb data. Before that, Beijing will more likely act in a low-profile way, including more spending on social housing and maintaining low inter-bank rates.
 
2014: Still a V-shaped recovery. MER reiterates their macro projection of a V-shaped path in 2014. Jan-Feb activity data are in line with their contrarian call at that time that GDP growth will slow in 1Q14, in spite of the low comparison base. Looking forward, growth could continue to slide in 2Q14, as the ongoing destocking and property down-cycle would continue to weigh on the economy. With growth likely falling below 7% in 2Q14, MER believes Beijing will then ease policy in a more aggressive way and the economy could turn around in 3Q14.