Hao HONG 洪灝, CFA (@HAOHONG_CFA)

Chinese economic data released yesterday were weak on the surface. Retail sales growth was negative, and growth in fixed assets and property investment declined further in May. The cash-for-clunkers subsidy has been suspended, and car sales were down 16%. Car sales alone dragged down retail sales growth by 150bps. However, service spending rose strongly by 5.4% y/y. It suggests consumer spending is now more on services than on goods. The Chinese consumer no longer uses things but instead uses experiences to define themselves. These numbers are consistent with our field observations. Further, while retail sales growth declined, high-tech exports were up strongly, diverging from the traditional manufacturing sector (chart). As such, economic data paint a picture of a country’s economy undergoing restructuring, and the process is powering ahead. This change is what we have been waiting for and talking about for years. Too much attention has been drawn to headline numbers without looking under the hood. And thus a wrong conclusion was drawn by consensus. Time to look at Chinese data differently.

How to explain the discrepancy between China’s expanding PMI and slowing Industrial Value Added? It’s possible that rising input costs, evident by surging commodities and PPI, are recognized earlier by accounting rules while revenue recognition is slower. The same reason as PPI often leads CPI. It is also possible that rising prices start to curb demand. But we won't know for sure till a few more data points later. I won't accept the explanation from the analyst community that last year’s base was too high. This higher base effect should have been factored into this year’s forecast.

China retails sales y/y growth slows further. 10 months out of 11 deceleration. It shows restructuring towards consumption based growth is challenging. Meanwhile, investment growth also slows, and new loan growth is negative. More work needs to be done to maintain growth target this year.