China Center LEI Commentary: LEI expands moderately, but component volatility offers little certainty

This China Center members-only report provides interpretive comments on The Conference Board Leading Economic Index® (LEI) and The Conference Board Coincident Economic Index® (CEI) for China.

The LEI for China increased by 0.8 percent in April from the month before, the same as March’s growth rate. In addition, the six-month growth rate of the index increased by 6.1 percent, up from 4.4 percent in the six-months-to-December.  

• By contrast, the CEI fell by 0.8 percent from March. Taken together these movements indicate that current activity remains weak and should continue to show volatility throughout the first half of the year. 
• Credit growth and consumer sentiment drove the increase in the LEI this month, while manufacturing components deteriorated. It’s important to note that consumer expectations and loan extension have both shown high volatility over the past months, thus underscoring the fragile nature of the LEI’s growth in this and recent months. 
• The broadly weak official data released in May appear to have spurred the government toward some policy loosening. So far authorities have concentrated on employing fiscal levers rather than reigniting monetary stimulus to avoid re-stoking inflation. In addition, the government seems intent on maintaining property curbs, and finding other areas in which to boost investment spending. Targeted consumption subsidies have also been introduced and similar additional measures may be forthcoming.
• These recent policy actions will necessarily take some time to pass through to the real economy. As such, the rest of Q2 will likely see economic activity remain weak before a moderate improvement begins to materialize later in the year. Overall, the economy remains precarious and the risk factors that we have highlighted in recent months have become more acute, in particular: (1) the potential for further weakening in external demand in relationship to Europe and (2) the possibility of a sharp correction in the real estate market and a consequent fall of in real estate-related investment.
• Looking forward, the prospects for greater fiscal spending, combined with incremental loosening of monetary policy and the eventual bottoming out of the inventory reduction cycle, should combine to perk growth back up moderately in the third quarter of 2012. Our GDP forecast for the year remains unchanged at 8 percent.