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China Feb data seen showing further slump in trade, smaller drop in FX reserves

China Feb data seen showing further slump in trade, smaller drop in FX reserves
March 4, 2016
BEIJING - A raft of China data in coming weeks is expected to point to a further loss of momentum in the world's second-largest economy, reinforcing expectations Beijing will unveil more support measures in coming months, a Reuters' poll of economists showed. The data is also expected to show another drop in China's foreign exchange reserves, suggesting continued capital flight. But the decline may be much less than in January, which could calm anxiety in global financial markets about the stability of the yuan currency CNY=CFXS. In its latest bid to shore up growth, the central bank on Tuesday injected an estimated $100 billion into the banking system to cushion the pain from planned job layoffs and bankruptcies in industries plagued by overcapacity. The move came days before the annual meeting of China's parliament, which must try to engineer a huge economic shift towards services and consumption and away from basic manufacturing, while also keeping growth stable. Markets may be most interested in lending data for February, after an unexpectedly hefty surge in new yuan loans in January to a record 2.5 trillion yuan ($382.06 billion). Much of that appeared to be generated by real economic activity, rather than speculative activities as is often the case in China. But the figures may have been skewed by Chinese banks' tendency to lend more money early in the year, and ahead of the long Lunar New Year holidays, which can distort the country's data trends in the first two months of the year. Analysts have been watching closely to parse China's strategy for reversing a dramatic slowdown in investment over the past year without adding to already high debt levels. "In our view, broad money supply growth has remained largely stable, helped by earlier RRR cuts and (central bank) open market operations," wrote Morgan Stanley economists in a note Wednesday on the outlook for upcoming data. "We expect new loan disbursement to the real economy to decrease but remain sizable at 1,000 billion RMB in February, reflecting the government's easing bias to boost domestic demand growth." The median forecast of analysts polled by Reuters put broad money (M2) growth and new yuan loans at 13.8 percent and 1.2 trillion yuan, respectively. M2 grew 14 percent in January. The outlook for trade, however, is expected to remain grim, reflecting persistent weakness in demand at home and abroad and weighing further on industrial production. Imports were expected to have dropped 10 percent in February after sliding 18.8 percent in January, while exports may have declined 12.5 percent from a year earlier, following an 11.2 percent drop in January, the median forecast of 31 analysts polled by Reuters showed. That may produce a trade surplus of around $51.15 billion. Industrial output likely grew 5.6 percent in January and February combined, compared with the year-earlier period, weakening from 5.9 percent in December, as firms struggled to cope with persistent deflationary pressures due to overcapacity and soft demand. Annual growth in urban fixed asset investment, a crucial driver of China's economy, likely grew 9.5 percent in January and February from a year ago, easing slightly from December's 10 percent growth. Annual retail sales growth was seen at 10.8 percent in the first two months of the year, just below December's 11.1 percent. China combines activity indicators for January and February in an attempt to smooth out the Lunar New Year effect. The Reuters poll also showed the economy is facing persistent deflationary risks. Consumer price inflation may have picked up marginally to 1.9 percent in February from 1.8 percent in January, while producer prices fell 4.9 percent, less than January's 5.3 percent fall but marking the fourth straight year that Chinese firms have had to cut prices of their goods in the face of sluggish demand and growing competition. Foreign exchange reserves likely fell for a fourth straight month, easing to $3.2 trillion from $3.23 trillion in January as the central bank continued to sell dollars to defend the yuan and staunch capital outflows. But the drop is expected to be much smaller than the near $100 billion fall in January and record $107.9 billion decline in December. China's economic growth cooled to 6.9 percent in 2015, the slowest pace in 25 years, and economists see it slowing further to around 6.5 percent this year. Some market watchers believe it is already much weaker than official data suggests. Central bank officials had said the January reserves decline may have been exacerbated by a rush by local firms to repay more expensive dollar-denominated foreign debt, a trend which they said may soon taper off, reducing downward pressure on the yuan. -Reuters