Why causes of China's economic slowdown are being misconstrued

Is there a need for more policies?

According to DBS, the focus of the market on China economic indicators is somewhat too narrow. The market is fixated on rescuing growth because the economy is slowing down.

The causes of the slowdown are however not being addressed in the right contexts. In fact, there is potential for even more “growth squeezing” policies.

Here's more from DBS:

First, the government’s ongoing frugality campaign has already hammered luxury goods and high-end catering businesses in the first quarter.

Retail sales were significantly affected. In late-May, China’s graft buster Wang Qishan ordered government staff to surrender their VIP cards, dealing a further blow to the retail and certain services sectors.

Retail sales growth in May will likely come in at 12.4% (April’s 12.5%). The scope of anti-extravagance measures is set to expand further - Beijing has already cut down CNY 10 million in its fiscal budget this year in response to the crackdown on corruption.

As such, we do not rule out further deceleration in retail sales growth in the coming months.

Second, ongoing property market tightening is intended to slow price ascent and restrain property investment. Yet, the growth of real estate investment has been outpacing than that of headline fixed asset investment (FAI) since January.

Real estate investment growth has escalated to an average of 21.7% over Jan-Apr from an average of 15.9% in 2H12. Likewise, property sales and prices are also pointing north - new home prices in Beijing are up 10.3% YoY in April. China’s largest real estate developer, Vanke, also reported a 67.6% YoY increase in contracted sales in the same month.

If anything, the government is likely to introduce more measures to curb further price ascent. FAI over Jan-May likely stayed flat at 20.6% compared to the first four months.

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