Chinese Retail Sales: The Asian Giant is Back?
A few weeks ago, China shocked the market by posting Q1 GDP growth that exceeded all expectations. This was followed by an improvement in investor sentiment, particularly benefitting the commodity currencies. But, given the general negative tone of the data from the months in question, investors worried that the data might just be an outlier.
So, now that we are going to be getting Chinese data from after the end of Q1, there is likely to be keen interest to see if the growth continues into the second quarter. Last week, Chinese trade data showed that the internal economy had healthy demand. That could be a sign that the stimulus measures from the government might finally be paying off.
Good News is Not Good News
However, a modest rebound in the Chinese economic data might end up disappointing markets more than giving them a boost. Investors have been hoping that poor performance in China would lead to increased government stimulus. That would be particularly relevant to the housing industry, which has high demand for commodities. If the rest of the Chinese economy is rebounding, then the pressure to stimulate the economy will diminish, and that could lead to investors pricing in less demand for certain raw materials.
As if to confirm that fear, the latest development in the housing saga is that it has been reported that Chinese officials are urging the government to buy up empty housing in cities with “excess” developments. This implies that the government is still in “containment” mode of the housing fallout, and isn’t providing direct support to the industry. Though, in the end, it could lead to a recovery of housing prices as it helps pull excess supply off the market. However, that might take time, and leave investors disappointed in the short term.
But Fuel Demand Remains High
While investors might be disappointed about the lack of demand for things such as steel for rebar in housing, or copper for electric cables to illuminate homes, the potential rebound in industry is a boon for a different commodity: Fuel. China is the world’s largest crude importer, and the pick up in industrial activity in the first quarter saw imports increase substantially.
Beijing confirmed that Russian President Vladimir Putin would be visiting President Xi Xinping later this month, with oil likely to be among the important topics of conversation heading into the winter. Higher temperatures have increased demand for electricity, and thus the demand for oil. With Saudi Arabia curtailing three million bbl/day, China might need to look for other sources to satisfy its energy needs without driving up inflation that could hurt consumer demand.
The Upcoming Data
China will release a barrage of data tomorrow, but a couple of the data points will be more important for the market. Industrial production could be the most important for commodities, including crude, and is expected to speed up growth to an annual rate of 5.6% from 4.5% prior.
Chinese Retail Sales for April are expected to also accelerate to 3.5% annualized growth from 3.1% prior. This increase in consumer confidence could be a sign that the Chinese domestic economy is surging back, and be more beneficial for exporters of consumer goods, such as New Zealand.
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