Analysts optimistic on short-term prospects for China, despite February data

Chinese economic data released over the weekend raised concerns activity might be slowing despite government stimulus, but officials said seasonal factors were partly to blame and some economists agreed – at least with a view to the short-term.

Industrial production grew by 5.4% year-on-year in January and February combined, in comparison to a 5.9% gain in December and the median consensus estimate for a gain of 5.6%, China’s National Bureau of Statistics said on 12 March.

In parallel, retail sales were up at a 10.2% year-on-year clip over that same period, which was down from the 11.1% pace observed in December (consensus: 11.0%).

However, NBS pointed out that weak global demand, deteriorating steel and chemicals production and a slump in tobacco had all weighed on factory output.

Capital Economics concurred, had it not been for the drop in tobacco output, as a result of unseasonably cold weather, then factory output in fact picked up. Similarly, statistical issues were likely behind the step down in retail sales, the think-tank said in a research report sent to clients.

Fixed asset investment printed ahead of analysts’ projections with a rise of 10.2%, that compared favourably with the 8.2% seen in December and the 10.0% gain registered over 2015 as a whole, the think-tank said.

In particular, property sector activity grew at a brisk pace at the start of the year, with property sales rising at the quickest rate in three years, Julian Evans-Pritchard, china economist at Capital Economics pointed out.

“Developers appear to have responded by stepping up the pace of new construction.”

Investment in real estate development increased to a 3.0% clip in the first two months of 2016 from a year earlier and in comparison to the 1.0% gain registered over all of 2015.

Meanwhile, the value of property sales rocketed 43.6% in the first two months of the year.

"To be clear, the long-run outlook for China remains challenging. The recent acceleration in credit will boost activity in the short-run but adds to long-run debt risks. Meanwhile, progress on key reforms looks likely to remain slow," Julian Evans-Pritchard said.

Analysts at Macquarie remained sceptical of the recent rally in metals and bulk commodity prices but on the previous Friday told clients it was important to identify where their forecasts might go wrong; namely, should high-frequency indicators point to a more aggressive recovery in Chinese property investment or new start activity.

“We also feel that, while physical markets have improved from a very weak period around the turn of the year, recent price moves have been difficult to justify from a fundamental perspective.

“Should high frequency indicators show a more aggressive recovery in property investment or new start activity, we would have to take another look at our demand figures, and the recent price moves may prove more sustainable,” the Australian broker said in a research note dated 11 March.

The Shanghai Stock Exchange’s Composite Index finished 1.75% higher on Monday at 2,859.499.

As of 13:30 three-month copper futures were rising by 0.9% to $4,974.00 per metric tonne in LME trading.

May-dated iron ore futures on China’s Dalian Commodity Exchange finished the session down by 2.3% at 422.5 yuan ($65.06) a tonne, after hitting a session high at 454 yuan, their highest since 16 January, amid speculation that Chinese steel output is recovering and will swamp a modest rise in demand.

According to NBS, Chinese steel output declined in the first two months of the year.