Easing required amid China's weak growth momentum

Latest economic activity report is disappointing.

China recently released its January-February report on economic activity, and the data, which included industrial production (IP), fixed-asset investment (FAI) and retail sales, was disappointing.

According to a research note from CCB International, the biggest downside surprise was FAI, which rose only 13.9% YoY in JanuaryFebruary, with the consensus at 15%.

IP and retail sales rose only 6.8% YoY (consensus: 7.7%) and 10.7% (consensus: 11.6%), respectively, confirming weakening growth momentum in China.

Certain trends in the figures suggest a promising structural shift towards growth is beginning to take place in China driven by services and household consumption.

Here's more from CCB International:

For instance, investment in services picked up to 14.8% YoY in January-February, despite a rapid turndown in FAI. Upgrade consumption, including retail sales of medicine, mobile devices and autos, continued to rise rapidly. Online sales also saw robust 47.4% YoY growth in the first two months of 2015.

There is a chance insufficient funding and industrial overcapacity could cap FAI growth in coming months. We anticipate a 25bp rate cut in 2Q15F along with a 50bp RRR cut in each quarter of 2015F.

China announced a debt swap plan that allows local governments (LG) to convert RMB1t high-yielding debt into municipal bonds. We expect the plan to ease the debt burden of the LGs while encouraging more fiscal spending and bank lending.

On 13 March, the Shanghai Composite Index rose 0.7% on upbeat February monetary data and a speech by Central Bank Governor Zhou Xiaochuan in support of China’s stock market. Governor Zhou brushed off concerns about credit funds entering the stock market arguing that it could help channel money into the real economy.

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