China – Downgrading our growth forecast on Delta
Zero tolerance on Delta leave its mark in August data, particularly on services. We expect pick-up in Q4, but downgraded our 2021 growth forecast to 8.3%. No real signs of passthrough from rising producer prices into consumer goods. This leaves room for a further piecemeal easing of macroeconomic policy.
We downgrade our 2021 growth forecast on delta, to 8.3% …
Over the summer, Beijing’s zero tolerance approach towards new (Delta) outbreaks – aimed at eliminating all cases – formed a clear headwind for economic activity, with particularly the services sector being affected. The tightening of mobility restrictions and the re-imposition of regional lockdowns right in the middle of the typical travel season obviously left its mark (see our for more background on China’s strict approach). China’s services PMIs for August dropped sharply below the 50 mark. That was for the first time since the initial covid-19 shock in Q1-2020, although back then the drop in the PMIs was much sharper.
Meanwhile, China’s manufacturing PMIs for August also continued their downward slide, with Caixin’s indicator now falling below the neutral mark (49.2) for the first time since April 2020. This partly reflects bottlenecks such as a scarcity in semiconductors hitting car production. We expect China’s services PMIs to bounce back in the coming months, as overall restrictions will be eased to some extent (notwithstanding a new outbreak in Fujian). We now expect hardly any quarterly growth in Q3. We anticipate this to be followed by some payback and a pick-up in Q4, assuming further piecemeal support (see below) and with China reaching herd immunity by year-end (according to the National Health Commission). As a result of all this, we have cut our 2021 growth forecast to 8.3%, from 9.0%.
… with activity data for August even weaker than for July
On 15 September, the monthly activity data for August came in much weaker than expected. That was particularly true for retail sales, with annual growth falling sharply to a post-pandemic low of 2.5% yoy (August: 8.5%, consensus: 7.0%). On a monthly basis, retail sales of consumer goods grew by 0.2% (seasonally adjusted), following a 0.2% contraction in July. Meanwhile, industrial production growth slowed to 5.3% yoy, the weakest pace in a year (July: 6.4%, consensus: 5.8%). Fixed investment growth also dropped further, to 8.9% yoy ytd (July: 10.3%, consensus: 9.0%).
By contrast, earlier this month foreign trade data for August came in stronger than expected, despite ongoing bottlenecks. Export growth accelerated to 25.6% yoy (July: 19.3%). Import growth rose to 33.1% yoy (July: 28.1%) despite the slowdown in domestic demand. All in all, Bloomberg’s monthly GDP estimate for August dropped further to 5.3% yoy, the weakest pace since July 2020. That said, we expect the economy to pick-up again from the Delta-related slowdown in Q4 and activity data to improve over the coming months.
Producer price inflation shows no signs of easing yet
After stabilising in recent months, producer price inflation edged up a bit in August, reaching a 13-year high of 9.5% yoy (July: 9.0%). Monthly PPI inflation rose to 0.7% mom (July: 0.5%). While this may flare up some investor concerns about global inflation, a closer look reveals that price pressures are mainly concentrated in the commodity spectre and primary sectors. The PPI sub-index for means of production rose by 12.7% yoy in August, driven by mining and raw materials industries. By contrast, the rise of the PPI sub-index for consumer goods index remained at a low 0.3% yoy. This indicates that the passthrough of pipeline pressures stemming from higher input costs (driven by commodity prices) to consumer goods is still limited.
The same observation can be derived from the development of consumer price inflation (CPI), with both headline and core inflation falling in August, to 0.8% yoy (July 1.0%) and 1.2% (July: 1.3%), respectively. As a result, the gap between PPI and CPI inflation has risen further to a new record high of 8.7 %-points. This leaves policy makers some room for further piecemeal easing in our view (see below).
Beijing continues with piecemeal easing
On the regulatory front, over the past months policy makers intensified and broadened a crackdown versus fintech firms and online platforms, bitcoin and sectors which do not contribute to the goal of common prosperity in the eyes of Beijing (such as online education and entertainment/gaming). The government had also tightened conditions for shadow banking and property developers for some time, with the property giant Evergrande now close to defaulting. We expect the authorities to strike a balance between fighting moral hazard and safeguarding financial stability.
Meanwhile, on the macroeconomic policy front, the government has already switched bank to piecemeal easing, following the recent slowdown of the Chinese economy. In July, the PBoC cut the reserve requirement ratio (RRR) for banks by 50 bps. The PBoC has also implemented special liquidity operations aimed at supporting bank loans to SMEs. A moderate fiscal easing is visible as well, with the issuance of local government bonds being on the rise. We expect this piecemeal easing approach to continue and have pencilled in another 50bp RRR cut for the rest of this year.
