We have seen expectations turn around in the financial market in recent weeks but demand remains weak.
The predictable outcome of the recent National People’s Congress meeting did not help matters.
While the authorities affirmed a loose monetary and fiscal policy, they hesitated about supply-side reform.
In addition, home prices in top-tier cities are climbing and credit growth is fueling expectations of recovery in commodities.
The situation is unlikely to continue into the second quarter.
Economic data for the first two months shows a sluggish real economy.
Growth in industrial production slowed to 5.4 percent from 5.9 percent in December.
Retail sales growth fell to 10.2 percent from 11.1 percent in December.
Surprisingly, fixed asset investment (FAI) bottomed out after rising to 10.2 percent from 10 percent in the same period, driven by recovering property and infrastructure spending.
Inventory levels in third and fourth-tier cities are about 24 months, holding back property investment.
Rising home prices and transaction volumes, especially in top-tier cities, show that recent tax cuts and lower down payment are beginning to produce results.
But the situation is risky and unsustainable.
Without proper intervention, bubbles will appear in top-tier cities before any destocking in secondary markets.
We expect the government to adopt different credit policies for different home markets to cool the heat.
Although the wholesale prices of oil, steel and other basic metals are recovering, we should be careful about chasing the uptrend.
The reason is that the recovery is being driven by small-scale inventory replenishment. Also, prices will remain volatile.
The latest figures on Asian PMI (purchasing managers’ index), Chinese retail sales and US imports from Asia are weak.
No one knows when real end-user demand will rebound.
This article appeared in the Hong Kong Economic Journal on April 6.
Translation by Myssie You
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