AM Notes: China growth slows

Regulators have pledged to curb the “reckless push” of technology firms into finance and this month outlined an overhaul of Ant, which will drastically revamp its business and be supervised more like a bank.

Shares in Tencent, Meituan and JD fell between 1% and 3% early Friday in Hong Kong.

“Some surveyed companies report that problems such as chip shortages, problems in international logistics, a shortage of containers, and rising freight rates are still severe,” NBS statistician Zhao Qinghe said in a statement accompanying the official PMI.

That contrasted with a private-sector survey, also released on Friday, which showed factory activity in April expanded at the fastest pace in four months although businesses in that release also reported a sharp surge in input costs.

“With the economy already above its pre-virus trend and the policy stance less supportive, growth momentum will wane this year,” analysts from Capital Economics said in a note on the PMI.

The official PMI, which largely focuses on big and state-owned firms, showed businesses again laid off workers in April after increasing hiring the month before for the first time in nearly a year.

A sub-index for employment slipped to 49.6 from 50.1 in March.

A gauge for new export orders stood at 50.4 in April, slipping from 51.2 a month earlier.

"China's credit formation has consistently led economic activity by ~6-9 months.

A turning point... occurred last October, which suggests that economic activity should start to slow in Q2 this year."

The outlook for construction is more complicated though, with local governments slowing the pace of debt sales to finance infrastructure projects and approvals for fixed-asset projects dropping sharply in the first quarter compared with previous years.

The real estate sector is also faced with stricter financing rules.

The construction sub-index in the non-manufacturing PMI fell 4.9 points to 57.4.

Beijing has ordered a halt to work on two high-speed rail projects with total investment of 130 billion yuan ($20 billion) in Shandong and Shaanxi provinces, signaling concern over growing local government debt.

China has relied heavily on building infrastructure like high-speed rail to maintain its fast economic growth, and such construction has become a policy tool to stimulate the economy during slowdowns.

But some worry that overuse of such policy could lead to dangerously high debt levels, and also result in projects that are ultimately poorly designed and underutilized.

'In both cases they cancelled the projects after discovering that they were designed mainly to create economic activity, and were not otherwise expected to generate enough economic value to justify the expenditures'

Late last year, Chinese regulators announced that property lending should make up no more than 40% of banks’ total lending, effectively putting an end to years of steadily increasing exposure to real estate.

Looking across major Chinese banks’ results for 2020, they are very much at that limit in aggregate. At the big four—Bank of China, China Construction Bank, Agricultural Bank of China and Industrial and Commercial Bank of China—real-estate lending ran to between 37.5% and 42.2% of total loans, according to Capital IQ.

If developers are seriously constrained on both bank and bond mkt finance, *and* maybe mortgage lending, then there's only one significant source of financing available to them.

Deposits from buyers are +29% in the last 12 months, now the largest single portion.