Fight against smog may be obscuring this year’s data

The Chinese government has indicated it remains intent on cutting back pollution. Premier Li Keqiang said last week in his annual government work report that authorities will strengthen pollution prevention and control in the year ahead.

At the same time, Li gave a lower economic growth target than last year, and said the country must be “fully prepared for a tough struggle.”

The economic outlook doesn’t bode well. Nomura’s Lu noted that pent-up demand in April and May of last year likely means the comparable year-on-year data on economic activity in the months ahead will be “negatively affected.” Lu lowered his first-quarter gross domestic growth forecast to 6.2 percent growth from the year-ago period, and maintained a forecast of an even slower 5.7 percent growth rate for the second quarter.

China’s economy grew at 6.6 percent last year, according to official government data, which represented the slowest pace since 1990. Beijing says it is aiming for 6 to 6.5 percent growth this year.

Analysts also pointed out that Thursday’s data release indicated the majority of fixed-asset investment came from property, while spending growth in areas more critical to the economy was less robust:

• Manufacturing investment dropped to a 5.9 percent growth rate in January and February, down from 11.6 percent in the fourth quarter.
• Infrastructure investment grew 2.5 percent, down from a 5.7 percent rate in the three months prior.

“(Thursday’s) data is the third wake-up call to the market in six days, after exports data last Friday and credit data on Sunday,” Larry Hu, head of China economics at Macquarie, said Thursday in a report. “All of them point to strong growth headwinds ahead, which lays the ground for a choppy market like 2012 (earnings downward revision and multiple upward revision, left charts) instead of a bull market like 2017 (both earnings and multiple being revised up).”

One of the few bright spots may be stabilization in retail sales, which Hu said he expects should grow at 8 percent this year, slightly below last year’s 9 percent growth.

The Shanghai composite fell 1.2 percent Thursday, and it’s down more than 3.5 percent over the last five trading days. Still, the index is up 19.9 percent for the year so far.