China's Recovery Still Relies on Stimulus as Outlook Upgraded
After a stronger-than-expected rebound in March, policy makers have signaled they are shifting away from broad monetary easing.
(Bloomberg) -- China’s economic recovery continued this month, underpinned by expansive fiscal policy as investors await a potential resolution of the trade war with the U.S.
That’s according to a Bloomberg Economics gauge aggregating the earliest available indicators on market sentiment and business conditions. Although stocks weakened in the second half of April, the big gains since the start of the year kept the three-month weighted average positive. Copper prices, sales managers and smaller enterprises reported weaker readings.
After a stronger-than-expected rebound in March, policy makers have signaled they are shifting away from broad monetary easing while maintaining supportive fiscal policy. The impact of sustained policy stimulus, plus heightened expectations for a deal that would end the trade battle with the U.S., have bolstered confidence even as downward pressures remain.
“Policy support is still necessary -- that means the government needs to keep spending and drive investment to keep domestic demand stable,” Bloomberg China economist Qian Wan said. “There is no improvement on the production side from the previous month.”
Economists surveyed by Bloomberg have upgraded their forecasts for gross domestic product growth in 2019, as policy feeds through into an improved outlook for businesses and households.
The economy will expand by 6.3 percent in 2019, according to the median of 67 replies in the survey, up 0.1 percentage point from the previous result. Analysts also upgraded their expectation for average inflation this year to 2.1 percent, a rate still in line with the government’s target despite the food-price gains driven by a major outbreak of African swine fever.
Better sentiment is being tested though, after top leaders signaled less stimulus ahead as the economy recovers. U.S. trade negotiators are due back in Beijing this week to push forward talks on ending the year-long tariff war.
Despite the easing of trade tensions, external demand remains a significant risk. Outbound shipments from South Korea -- a major supplier of components to Chinese assemblers of electronics such as iPhones -- fell 8.7 percent from a year earlier in the first 20 days of the month, dropping for a fourth month.
“Policy makers will continue to keep fiscal supporting measures in place,” said Robin Xing, chief China economist at Morgan Stanley. “Policy makers still pay considerable attention to the downside risks. The global economy is not doing very well this year, so it’s wise to have some policy reserve.”
On the ground, smaller businesses are sending mixed messages, according to a survey of more than 500 companies conducted by Standard Chartered Plc. Conditions reported by sales mangers also weakened this month, according to London-based World Economics Ltd.
“Resilient sales following the Lunar New Year holidays drove a recovery in production activity and hiring,” Beijing-based Standard Chartered economist Shen Lan wrote in a note. "However, downward pressure on output prices weighed on the profitability outlook. Investment appetite remained sluggish in April, partly due to the weaker expectations on profitability."
A gauge of banks’ willingness to lend to small and medium-sized firms rose to a record high in April, underscoring that policy is still supporting businesses, Shen wrote.
--With assistance from Cynthia Li.
To contact Bloomberg News staff for this story: Xiaoqing Pi in Beijing at xpi1@bloomberg.net;Adrian Leung in Hong Kong at aleung206@bloomberg.net
To contact the editors responsible for this story: Jeffrey Black at jblack25@bloomberg.net, James Mayger
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