China Industry Output Beats Forecasts, Sales Up

China's factory output growth rebounded in May alongside stronger expansion in credit and consumer spending, bolstering evidence that the world's third-largest economy is on the path to recovery.

Elizabeth Dalziel / AP

The figures, which round out a batch of monthly data that has mostly surprised on the upside, suggest that the government's huge stimulus spending and tax breaks to encourage purchases of everything from cars to home appliances are helping to offset continued weakness in exports.

The acceleration in industrial production growth, to 8.9 percent compared with 7.3 percent in April, beat economists' forecasts of a 7.5 percent rise but was in line with a figure reported by two Chinese newspapers earlier this week.

Retail sales grew by 15.2 percent in the year to May, also beating forecasts and up from 14.8 percent expansion in April.

Together with the rebound in new domestic-currency lending in May, to 664.5 billion yuan ($97.3 billion) compared with 592 billion yuan in April, the data paint a picture of an economy pulling up from a bottom.

"The worst is over for the Chinese economy," said Hao Daming, senior analyst with Galaxy Securities in Beijing.

"The pace of destocking in the past three months has been very rapid. Now China has almost reached the end of the destocking process."

Asian shares moved towards new highs for the year on Friday, buoyed in part by the stronger-than-expected data, which helped add to hopes that the worst is over for the global economy.
     
Property Investment Rebound

The stronger-than-expected production growth is due mainly to policy-driven investment growth, but other positive signs include a rebound in property investment in May, said Qing Wang with Morgan Stanley in Hong Kong.

The government has been frontloading a 4 trillion yuan ($585 billion) stimulus package focused on infrastructure investment, driving annual growth in fixed-asset investment in the first five months up to 32.9 percent.

The real estate sector, which accounts for almost a quarter of fixed investment, saw growth of 6.8 percent in the first five months, up sharply from 4.9 percent in the January-April period.

Exports and imports both fell in May from year-earlier levels for the seventh month in a row, but Wang said he expected to see some relief in external demand as well.

"We expect the economy to accelerate in the remainder of the year because currently we see policy-driven investment growth, but at the same time we expect that exports should have bottomed and will gradually improve," he said.

Bank credit continued to surge, with the stock of yuan loans at the end of May up 30.6 percent from a year earlier.

Banks have now extended a total of 5.84 trillion yuan of credit in the first five months of the year, well above the government's minimum target of 5 trillion yuan for the whole year.

     
Concern About Bad Loans

"Without window guidance from the regulator, new loans will continue to grow quickly, driven mainly by smaller lenders, while in earlier months, loans were mainly from big banks," said Lu Zhengwei, chief economist with Industrial Bank in Shanghai.

That has created some concern about the potential for a rebound in bad loans down the road.

But Liu Mingkang, head of the China Banking Regulatory Commission, said at a financial conference on Friday that banks remained sound, with their leverage ratios well-controlled.

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However, he added that there were questions about the real estate sector, meaning that China must ask whether the positive signs in the economy are for real.

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