China - August activity data surprise to the upside

China Macro: August activity data come in better than expected

China’s activity data for August published this morning generally came in stronger than expected, despite ongoing headwinds from pandemic flare-ups and related local lockdowns and property sector woes. The biggest positive surprise came from retail sales. Annual growth accelerated to a 13-month high of 5.4% yoy (July: 2.7%, consensus: 3.3%) helped by ongoing strong car sales. That partly reflects a weak base from last year, while property sales continued to struggle (-30.3% yoy). Annual growth of industrial production accelerated to 4.2% yoy (July/consensus: 3.8%), supported by a heatwave-related surge in electricity production (despite local power shortages). Fixed investment also surprised to the upside, with annual growth picking up marginally to 5.8% yoy ytd (Jan-July: 5.7%, consensus: 5.5%). This is partly a reflection of the stepping up of policy support, as infrastructure investment continues to pick up. Ongoing problems in real estate are illustrated by an even deeper slump in property investment (-7.4% yoy ytd, versus -6.4% in Jan-July). Meanwhile, the unemployment rate in urban areas dropped further to a 7-month low of 5.3%, with youth unemployment falling back to 18.7% (from a historic high of 19.9% in July). The improving data were also visible in Bloomberg’s monthly GDP estimate for August, which rose to a six-month high of 5.2% yoy.

Rebound continues, but still constrained

All in all, the latest data are supporting our view that the rebound from the severe lockdown slump in March/April will lead to above-trend qoq growth in the second half of this year, with the stepping up of policy support gradually filtering through. That said, the strength of this rebound is still constrained by headwinds from strict Covid-19 policies (although the overall lockdown intensity has clearly fallen compared to March/April despite new local lockdowns) and by an intensification of real estate problems. The slowdown in global demand will form an additional headwind, even though net exports will continue to contribute positively to GDP growth in Q3. This might also explain why Chinese authorities have tolerated a slide of the yuan versus the US dollar to above the 7 threshold, which is of course also a reflection of general US dollar strength – with another large Fed rate hike coming up the coming week. Against this background, the PBoC has paused further piecemeal monetary easing: the rates on its Medium-Term Lending Facility were kept unchanged earlier this week and we do not expect cuts in the Loan Prime Rates next week. That said, we expect the authorities to resume piecemeal monetary easing later this year, while the stepping up of policy support – including for real estate – should also help safeguard growth going forward. Still, our growth forecast for 2022 is around 2% points below Beijing’s growth target of 5.5%.