China's economy is revealing pockets of weakness ahead of Friday's data

BEIJING – As the Chinese economy enters the second quarter of the year, some indicators point to slower growth ahead if things do not change, raising expectations of monetary policy easing.

The National Bureau of Statistics is scheduled to release data on retail sales, industrial production and investment in fixed assets for April on Friday. Analysts polled by Reuters as of Tuesday expect a slight increase compared to March.

On the same day, China plans to issue its first long-term bonds — for 30 years — as Beijing begins a previously announced program totaling 1 trillion yuan ($138.25 billion) of major strategic projects. The Ministry of Finance did not specify the purpose for which the first tranche would be used.

“With releases continuing into November, it is likely that some revenue spending (and thus benefiting the economy) will only emerge in the first half of next year,” Louise Law, chief economist at Oxford Economics, said in a note on Tuesday.

The company expects this week's economic data to show a “decline in economic momentum,” confirming its expectations that the central bank will cut interest rates by the end of June.

The central government bond program comes as the real estate sector continues to decline, while businesses and consumers remain largely conservative on spending.

Over the weekend, the People's Bank of China released new loan data for April that pointed to a sharp decline in demand, with many metrics reaching their lowest levels in at least two decades.

Goldman Sachs and other corporate analysts were quick to point out that the one-month numbers were affected by changes in how official data is calculated, as well as a crackdown on loans used for financial purposes rather than business expansion.

“Some weakness indicates a real slowdown in demand in China at present,” Hui Shan, chief China economist at Goldman Sachs, said in a note on Sunday.

Outstanding loans in Chinese yuan rose 9.6% year-on-year in April, the same pace as March and the lowest since records began in 1978, according to official data accessed by Wind Information.

New bank loans to businesses and government organizations fell sharply in April compared to March, as did new loans to households, according to official data accessed through Wind Information.

What's worrying to analysts at Clocktower Group is that the 12-month moving average for both categories of new loans has started to trend downward for the first time since the 2008 financial crisis.

“If the public sector does not take the initiative to support credit growth in a timely manner, a sharp slowdown in growth is likely to occur in the future, as economic agents will be forced to reduce consumption and investment to meet their debt obligations,” the company said recently. April.

On a 12-month moving average basis, the category of new bank loans including businesses saw a slight increase in April versus March, while new home loans declined during that period, according to a CNBC analysis of data accessed through Wind.

The data showed that the volume of new business loans remains much higher than in 2019, although household loans have fallen below that level.

A survey conducted by The China Beige Book in April showed that corporate borrowing fell, dragged down by services, while manufacturing saw an increase in demand. The overall decline came despite more loans being approved and interest rates falling, making borrowing cheaper.

M2, a measure of the money supply that includes cash, cash equivalents and some deposits, grew 7.2% in April from a year ago, the slowest pace on record dating back to 1986, according to official data accessed through Wind Information.

“Looking ahead, the growth of new Chinese yuan and M2 loans may gradually slow further, as the People’s Bank of China highlighted the weak relationship between economic growth and… And credit expansion,” referring to the central bank's quarterly monetary policy report. Released Friday.

“We continue to expect two additional reductions in the required reserve ratio and one reduction in the interest rate over the remainder of this year,” they said.

RRR refers to banks' reserve requirements, or the amount of cash they need to have on hand. People's Bank of China (PBOC) Governor Pan Gongsheng told reporters in March that there was room to reduce reserve requirements further.

“April credit data is disappointing, but this is mainly due to regulatory changes rather than a sharp deterioration in underlying demand,” Larry Hu, chief China economist at Macquarie, said in a report.

He added: “Policymakers do not want another credit-fueled recovery. Instead, they are happy to rely on exports and new energy sectors to drive growth, at least for now.” He expects exports to remain on track to achieve 5% growth this year, while noting that the automotive sector has performed well.

China's exports held steady despite escalating trade tensions. Data released last week showed that exports grew year-on-year in April, up 1.5% in line with expectations, while imports grew much more than expected.

Separate figures released over the weekend showed a modest rise in consumer prices in April. But the price scale in factories continued to fall.

However, real estate, which once contributed at least a quarter of China's economy, remains a drag, despite a growing number of cities easing purchasing restrictions.

Standard & Poor's ratings agency said in a report early last week that property sales are increasingly shifting to the secondary market, meaning developers are not benefiting much in a market that is still “looking for the bottom.”

Standard & Poor's analysts expect China's prime residential market to shrink by 16% this year.

China's house price index is also scheduled to be released on Friday. Looking ahead, investors are awaiting a major government meeting scheduled for July for signals on long-term economic policy.

“Separately, the People's Bank of China suggests it will consider policies to help absorb existing housing stock and improve new housing supply in order to stabilize the real estate market,” Morgan Stanley analysts said.

“We believe this reflects the message from the recent Politburo meeting regarding the property market, and shows that monetary policy can be used as part of support measures to help China deal with its large property stock.”

— CNBC's Michael Bloom contributed to this report.