CLSA Asia-Pacific Markets China Macro Strategist

SINOLOGY FLASH: Retail sales & power for April

No surprises from the release this morning of China’s retail sales and power generation data for April. Retail sales continue to hold up well, consistent with improving macro conditions and strong sales of homes and autos. As expected, power generation growth slipped a bit last month, but we think this reflects a temporary pullback in steel production and is not a signal of industrial weakness.

Nominal retail sales rose 14.8% YoY in April, in line with March’s 14.7% and 15.2% in January/February. In real terms, retail sales rose 17% last month, up from 16.4% in March and 15.7% in January/February. This is a key data point, as we expect consumption to account for half of the about 8% GDP growth we forecast for this year. (Investment will be the other half, and the April FAI data released yesterday was also very healthy.)

After improving for three consecutive months, power generation growth slipped a bit in April, down 3.5% YoY compared to minus 1.3% in March.

As we noted Monday in anticipation of this slip in YoY power generation growth, we do not think it represents a slip in overall manufacturing activity. The CLSA PMI sub-index for output (production) rose sharply in April, to 51.3 from 44.3 in March, the biggest MoM jump in the five-year history of our PMI. April’s reading was the first over 50 (signalling expansion) since last July.

The cause of the slip was more likely a slowdown in the growth rate of production of steel. Remember that steel accounts for 15% of total power consumption, so power moves disproportionately along with this sector. That slowdown would have been caused by slower than expected purchasing by infrastructure projects last month.

In our view, a slowdown in steel production last month will prove temporary, as there strong indicators of rising demand:

Infrastructure projects are just getting underway and this will accelerate through the rest of the year. A new study by CLSA’s China Reality Research finds that 93% of 14 steel mills reported an increase in infrastructure-related demand last month.

Strong home sales have led to an uptick in real estate investment, which we expect to accelerate. A CRR study among 80 developers found that 45% of builders on the coast expect a YoY increase in new starts in 2009.

Auto sales are strong. And not just smaller cars. Mercedes-Benz has released sales figures which indicate that Chinese are back buying luxury cars, not just small models that that have benefitted from a reduction in sales tax (to 5% from 10%). Mercedes deliveries to customers in China rose 59% YoY to 5,600 cars in April. That’s in contrast to a drop of 24% YoY in global sales of Benz cars last month. Sales in Germany fell 30% in April, while Japan sales dropped 50%. In the first four months of this year, sales in China rose 32%, while they fell 23% globally. In the first four months of the year, Mercedes sold 17,400 cars in China, compared to 9,200 in Japan and 335,800 world-wide.