China Center LEI Commentary: Increased volatility will likely characterize the second quarter, just as it did the first

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.

In March the LEI for China edged up by 0.8 percent from the month before while the six-month growth rate remained steady.  

• However, movements among the underlying indicators still point to a continued slowing of economic growth in coming months. Specifically, volatility is seen among the components along with a weakening in the diffusion index, which measures the percent of indicators adding positively to the LEI’s growth. 
• First quarter GDP – released in mid-April – was 8.1 percent (y-o-y), the slowest growth rate in almost three years. The GDP figure aligns with recent movements in the LEI and CEI that show a gradual reduction of overall activity, while also exhibiting increasing volatility in more granular data. For March in particular, the economy saw a strong increase in credit extension combined with a significant easing in investment and continued cooling in the real estate sector. 
• This current economic uncertainty has created a difficult policy environment for the leadership. Sustained tightening, especially in the real estate sector, could cause investment to drop off too rapidly, while premature loosening in housing or credit could re-stoke inflation and asset bubbles. Due to the large jump in new bank lending seen in March, the markets seem to think that some acceleration of loosening may be underway to buoy growth and prevent further slowing. However, there currently seems to be no fundamental economic reason to expect growth to pick up later in the year unless greater policy support materializes.
• We continue to expect that the Chinese leadership will tolerate continued slowing, provided that it remains gradual, and our GDP projection for 2012 remains at 8 percent. However, the downside risks around our baseline scenario have arguably increased in recent months with the increased economic and political volatility.