It was just yesterday when we noted the sharp collapse in the Chinese credit impulse, when in May, the PBOC reported that Total Social Financing grew at the slowest pace since July 2016, as a result of a full-blown crackdown on China's shadow credit system.

Barely 24 hours later, China served not one but two major surprises that were the direct result of the sharp slowdown in China's credit dynamo.

On Thursday China reported activity data including industrial production, fixed asset investment and retail sales, which missed across the board - in the case of fixed investment the weakest on record - and were the most definite confirmation yet that China’s economy is finally starting to get hurt under the weight of a multi-year crackdown on risky lending that has pushed up borrowing costs for companies and consumers, and has led to a surge in corporate defaults.

The number suggested further weakness ahead if Beijing continues with its crackdowns on pollution, questionable local government spending and off-balance sheet “shadow” financing, which as we reported yesterday tumbled at the fastest monthly pace on record.

The data, which showed the slowest investment growth in over 22 years, “was all shockingly weak by Chinese standards,” according to economists at Rabobank who warned to “get ready for headlines talking about Chinese deleveraging hitting the economy – except it isn’t even deleveraging yet! China is walking more of a tightrope than markets believe – and the data underline that issue clearly."

The numbers in question:

• Industrial production (IP): +6.8% yoy in May, missing consensus est of +7.0% yoy; and down from April: +7.0% yoy, +6.6% mom annualized.
• Retail sales: +8.5% yoy in May, missing conesnsus of +9.6% yoy, and down from April: +9.4% yoy, the slowest since June 2003.
• Fixed asset investment (FAI): +6.1% ytd yoy in May, missing consensus est: +7.0% yoy; and same as April yoy: +6.1%. This was the slowest pace since at least February 1996.

FAI growth slowed mainly on lower infrastructure investment growth

Industrial production growth decelerated in May

As Reuters notes, China has been walking a fine line between rolling out measures to curb financial risks and pollution and tapping the brakes so hard that business activity slows sharply. Much of their effort so far has focused on the banking sector rather than corporate debt reduction or deleveraging - possibly explaining why China’s headline growth has been so surprisingly solid, prompting some such as Morgan Stanley to wonder if Chinese credit impulse has decoupled from the Chinese economy. Now we can confirm it has not as official and unofficial gauges are now showing the regulatory crackdown is starting to filter through to the broader economy, with companies complaining it is harder to get financing and a...