China’s weak economic figures in July meant that our China Tracker (methodology in a previous publication) saw further deterioration in July-August. In July, our China tracker is at -1.15 (measured in standard deviations from trend), from -0.57 in June. The major swing factor is loan growth, which slowed in July despite official liquidity support. Electricity growth and “new economy” retail sales have also moderated. The only sub-index that was positive is property, albeit moderating for four consecutive months already.
China’s PMI figures for August showed continually muted momentum in the economy. Manufacturing PMI was just 49.5 compared to 49.7 a month ago. Examining its components, new orders (domestic and exports), employment, imports, output prices and inventories were the main drags to the sector. Still, we saw some improvements in new orders (domestic and exports). Purchase quantity and input prices turned positive. The outlook for medium enterprises was the worst, although large enterprises returned to marginal positive territory.
A rebound to positive territory for Caixin manufacturing PMI means that the private sector may have seen some improvements in August, albeit from a weak position.
Non-manufacturing PMI slightly improved to 53.8 in August from 53.7 in July. Selling prices (expansionary) and employment (contractionary) improved compared to July. Still, the positivity in new orders faded.
Figure 2: China Tracker (green=positive, red=negative)
Source: Continuum Economics. Note: CNT refers to China tracker, shades determined in standard deviations away from three-year averages. NERS refers to “new economy” retail sales (e.g., information and communications); PPTY: property prices; EMPP: manufacturing employment PMI; SVSP: non-manufacturing PMI; RAFR: rail freight; ELEC: electricity output; LOAN: loan growth.
Our Forecasts for August
We expect August data to confirm that Q3 growth will be slower than Q2. This is despite expected pickups (slight) in industrial production and retail sales compared to a month ago. Still, fixed asset investment growth should remain stable in the absence of a significant stimulus to the economy. Trade figures are likely to show the divergence between slightly-positive external demand and negative domestic demand. Meanwhile, we see little prospect for a change in price trends. Inflation likely remains elevated from food, but producer prices likely remain relatively depressed, posing continued challenges to the economy. We also see chances that money supply growth and loan growth will accelerate, as authorities provide a slightly accommodative stance.
Figure 3: China Forecasts (August)
|Foreign Reserves (USD bn)||3,100||3,104|
|Aggregate Financing (CNY bn)||1,700||1,011|
|New Yuan Loans (CNY bn)||1,150||1,060|
|Money Supply M2 (% y/y)||7.9||8.1|
|CPI (% y/y)||2.7||2.8|
|PPI (% y/y)||-0.5||-0.3|
|Exports (% y/y)||2.6||3.3|
|Imports (% y/y)||-2.8||-5.3|
|Trade Balance (USD bn)||37.30||44.61|
|Industrial Production (% y/y)||5.1||4.8|
|Retail Sales (% y/y)||7.9||7.6|
|Fixed Asset Investment (% y/y YTD)||5.7||5.7|
Source: Continuum Economics