China: Leading index points to stabilisation in April after a weak March – Nomura

Analysts at Nomura suggest that their China’s Composite Leading Index (CLI) continued to pick up in March from January-February, but the overall Q1 average remained low compared with Q1 2017.

Key Quotes

“The rise in the CLI was mainly driven by widening yield spread, strong production of metal-cutting machines and crude steel, as well as solid quasi money supply. Production of autos and chemical fibres, stock market performance, trade growth and PPI inflation weighed on the headline number in March.”

“Our Monetary Policy Signal Index (MPSI), which measures the probability of monetary policy tightening (positive) or loosening (negative), rose to -0.25 from a downward revised -0.32 in April. This suggests China’s monetary policy stance will continue to move towards the neutral zone in May. The People’s Bank of China lowered the reserve requirement ratio (RRR) by 100bp in late April, not a sign of monetary policy easing, but to maintain stable liquidity conditions, in our view. This RRR cut strengthens our conviction that China’s money supply is experiencing a regime change from one driven by the monetary base to one driven by growth of the money multiplier, and the pace of interest rate liberalisation may speed up further. We continue to expect a neutral monetary policy stance through this year, to support China’s multi-year task of financial deleveraging.”