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External sector remained strong, with exports growing by 14.1%yoy and imports growing by 25.3%yoy, led by AI-related tech demand and higher commodity prices. But strong exports were still not enough to offset the consumption drag.
Domestic demand weakened further in April: A sharp 1.5ppts slowdown of retail sales growth to 0.2%yoy, a 1.6ppts IP growth deceleration to 4.1%yoy, a 1.6% contraction of FAI in Jan-Apr., a continued property prices decline and etc.
A soft credit transmission seen in April too. Liquidity was ample and pushed interbank rates lower, but credit demand remained weak, with declining growths of TSF aggregates and loans.
Iran war explains part of the weakness in April data, as it caused higher input costs, hit company margins and consumer purchasing power. Our calculation indicates that China’s April crude oil supply-demand balance still managed a slight net surplus (0.4 million barrels per day) – lower domestic oil consumption despite declined crude oil imports.
The lingering Iran war and continued blockade of the Strait of Hormuz increase the risks of adverse non-linear impact of energy supply disruptions on Chinese economy ahead. Please refer to our recent work on scenario analysis of Iran war on Chinese economy and CNY (link)
USD/CNY: over the next month or two, the pair is likely to stay broadly range-bound with a slight downside bias. We maintain our base-case forecast of USD/CNY to reach 6.75 by the end of Q2.
