China - More signs of stabilisation, as support starts filtering through

After a rapid reopening rebound in Q1, the Chinese economy lost steam, as headwinds from problems in the property sector and from the global growth slowdown intensified. Moreover, scarring from previous stringent policies also form drags on consumption and private investment, while renewed signs of distress in property over the summer impacted confidence and sentiment as well. Meanwhile, Beijing continues with piecemeal monetary easing and the stepping up of targeted support, particularly for the property sector, in line with our expectations. That seems to have started filtering through, as the August macro data are pointing to stabilisation. This lends support to our view that quarterly growth will pick up again in 2H-2023.

August data generally point to some stabilisation in growth momentum; property market data still weak

Following disappointing Q2 GDP and July activity data, the August data indicated some stabilisation. Both the official and Caixin’s manufacturing PMIs improved, but the official PMI remained below the neutral mark separating expansion from contraction. Lending volumes clearly picked up compared to July. CPI inflation returned to positive territory, although still very low at 0.1% yoy (July -0.3%) , with core inflation stuck at 0.8%, and producer price deflation easing further. Imports and exports remained in contraction territory, but improved on a monthly basis. Retail sales accelerated to 4.6% yoy (July: 2.5%), helped by a pick-up in summer travel activity and related spending. Industrial production picked up to 4.5% yoy (July: 3.7%). The jobless rate fell back to 5.2% (July: 5.3%). Not all data showed improvement, though. The services PMIs came down further, with the gap between manufacturing/services PMIs closing rapidly. This reflects the fading of the reopening rebound, with services initially benefiting the most from the Zero-Covid exit. And fixed investment slowed further to 3.2% yoy ytd (Jan-July: 4.4%), with private investment still particularly subdued. Property market data also remained weak in August, showing that the recent stepping up of support for the sector (see below) is yet to filter through. All in all, Bloomberg’s monthly GDP estimate for August showed the first improvement since April, rising to 5.9% yoy (July: 5.2%).

Beijing continues with piecemeal monetary easing and targeted support, particularly for the property sector

Following a second round of mini cuts in some policy rates last month, in mid September the PBoC cut banks’ reserve requirement ratios for the second time this year (by 25bp), freeing up additional liquidity and enabling banks to increase lending to local governments to help implement fiscal stimulus.Beijing also stepped up property sector support, by easing downpayment requirements for housing and enabling further reductions in mortgage rates. After these measures were announced at the central level end-August, they have been implemented in many large cities. There is some initial evidence that home sales are starting to bottom out following these measures. The government has also taken other measures in an attempt to stimulate consumption (such as expanding household tax breaks), restore confidence amongst private firms, and promote the manufacturing industry. All in all, we expect piecemeal monetary easing and targeted support to continue, but we still do not expect a ‘credit bazooka’ given that Beijing wants to keep leverage in check – particularly in the property sector – and given constraints regarding local government finances and shadow banking.

This article is part of the Global Monthly of 26 September 2023