China Macro-Mar/1Q15 GDP: real economy even weaker than growth number suggests

The darkest moment of this year: Today the NBS released March/1Q15growth data. Given yesterday’s disappointing credit growth data,unsurprisingly today’s data are fairly weak. Industrial production (IP) growth inMarch was much below consensus, slumping to 5.6% yoy in Mar (consensus:7.0%), the slowest pace since Feb 2009. Given today’s data, we expect morepolicy easing to come, including faster infrastructure investment approval aswell as rate/RRR cuts.

The real economy feels more pain than headline GDP suggests: Althoughreal GDP in 1Q15 only mildly moderated to 7.0% yoy from 7.3% in 4Q14 (qoq:1.3%), nominal GDP growth slumped to 5.8% yoy from 7.7%. The smootherreal GDP growth is largely the result of price deflator. However, for the realeconomy, what matters to sales and earnings growth is nominal, rather thanreal growth. It reminds us of the experience of 2012, which also saw a sharpdrop of nominal GDP growth but a much smoother real GDP growth (2011 vs.

2012: nominal GDP: 18.4/9.3%; real GDP: 9.3/7.7%).

Infrastructure investment remains the sole growth supporter: Fixed-assetinvestment (FAI) growth moderated to 13.2% yoy (consensus: 13.9%) in Marfrom 13.9% over Jan-Feb. Both manufacturing and property FAI growthcontinued to slow down (10% and 7% yoy respectively), while infrastructureFAI jumped to 25% in Mar from 21% in Jan-Feb.

Property sector still weak but on the mend: Home sales (in volume), theleading indicator of the sector, fell 1.6% yoy in Mar, narrowing from a 16.3%drop in Jan-Feb. However, property investment remains a drag to growth.

Property FAI growth slowed to 6.5% yoy in Mar from 10.4% in Jan-Feb, whilenew starts slumped 19.5% yoy in Mar after falling 17.7% in Jan-Feb. It’s nottoo surprising though as developers tend to chase momentum. At this stage,they are more likely to be cautious until sales pick up.

Now is similar to mid-2012: While acknowledging now is the darkestmoment for the whole year, we are still constructive on the economy in 2015.

Most of the negatives (property and destocking) are cyclical and thereby sowthe seeds for future recovery, although yesterday’s credit data suggest thatthe PBoC needs to find a way to inject more liquidity to the real economy(March money data: The PBoC’s biggest challenges). In terms of the cyclicalposition, now is similar to mid-2012, when the PBoC cut interest rates twice ina month. But growth only started to accelerate notably in 4Q12 on reboundingproperty investment and inventory restocking. It turns out that both propertyFAI and industrial earnings growth bottomed in 2Q12 (charts on left) and wereckon that this time they have bottomed in 1Q15.