China - Long-term industrial policy vs. short-term demand management

August data confirm that previous support has not really moved the needle yet

Recent data confirm that domestic demand remains weak and overall growth momentum is stalling. The August manufacturing PMIs brought back the divergence between a weak NBS reading and a stronger Caixin outcome, while both composite PMIs remained at relatively weak levels (also see here). The hard data for August generally came in weaker than expected, with exports being one of the few positive exceptions. Retail sales slowed to 2.1% yoy, although these seem to overstate the weakness in overall private consumption (see box in global theme). Industrial production and fixed investment also slowed (further), with annual growth of private investment turning negative again. Meanwhile, property investment and home sales stayed deeply in contraction territory and the drop in house prices accelerated (also see here). Labour market indicators are also weakening. The registered unemployment rate edged up to a seven-month high of 5.3% in August, while the youth unemployment ratio – adjusted this year to exclude students entering the labour market – rose to a record high of 18.8%. Risks on the external front are rising as well, with the US economy slowing, the eurozone economy stagnating, and with trade spats broadening.

Beijing’s focus finally switches back from industrial policy to demand management

In recent years, Beijing’s key priority was industrial policy – aimed at solidifying China’s long-term position in high tech and reducing the role of real estate – rather than short-term demand management. Support measures taken so far have been targeted/piecemeal so far, and did not succeed in breaking the negative feedback loop in real estate. With weak private consumption and investment, a deteriorating labour market and rising external risks, we held the view for quite some time that more focus on demand management was needed and likely. And indeed, on September 24th the PBoC announced a stimulus package, with three pillars. The first was a 20bp cut in the 7-day reverse repo rate (which has become more important in the PBoC’s policy toolkit), and a 50bp RRR cut – followed by a 30bp cut in the 1-year medium-term lending rate the day after. The 50bp cut by the Fed earlier this month had created more room for maneuver in this respect. The second consisted of measures to stabilise the property sector (lowering mortgate rates, easing downpayment requirements, PBoC guarantee for local governments buying homes). The third measure was the installment of a fund to stabilise the stock market. These measures have quickly led to an improvement in market sentiment (with the CSI-300 index surging this week), but we expect this to be followed by additional fiscal measures to support the property sector and domestic demand (confirmed by the Politburo on September 26th). All in all, we think these measures will change the balance of risks to our growth forecasts of 4.9% for 2024 and 4.5% for 2025 in a positive direction (we will review them after the publication of the Q3 GDP numbers on October 18th).