China: August Data Stabilises but More Q4 PBOC Easing To Come
Bottom Line: Better than expected retail sales and industrial production in August helped to produce some stabilisation of China’s economy in August, but data also shows that the residential property sector remains in a deep contraction. With only modest policy stimulus we do not expect a sustained bounce in the economy and still forecast 4.0% 2024 GDP growth. Thus we feel still more stimulus will likely be required in Q4. We have pencilled in a 10bps cut in the MTF rate in October and December and a further 25bps cut in the RRR rate in November.
Figure 1: Residential Property Investment YTD (%)
Source: Datastream/Continuum Economics
August Data Some Stability, But
The good news is that August retail sales (4.6% Yr/Yr v 3.0% expected) and industrial production (4.5% Yr/Yr v 3.9% expected) were better than expected and show stabilisation in key parts of China economy. The breakdown of the retail sales shows that it was helped by the rise in oil prices boosting fuel (+6.0 Yr/Yr) and jewellery (+7.2%), but also other categories improved. Restaurants slowed to 12.4% Yr/Yr from 15.8%, but this is still resilient. Industrial production was helped by high automobile production in August.
However, it is not all good news with residential property investment at -8.8% YTD versus 8.5% in July YTD, while existing home prices fell 0.48% on the month across 70 cities. This weakness in residential property investment drag down overall positive investment despite ongoing public infrastructure investment. Indeed, the mood is not really lifting in the residential property sector, with reports suggesting that the effects of lower deposit and mortgage rates on new sales has already started to fade in Beijing and Shanghai. Of greater concern is reports that the PBOC offer of free loans to major state and private banks issuing loans to property developers has only seen a tiny usage, as banks need to lend double the amount to qualify and remain reluctant to lend to property developers. We continue to feel that construction in private residential property remains in distress (Figure 1) and will cause more of a drag on the economy and associated sectors (e.g. cement and steel). This is key headwind and is behind our forecast of 4.8% 2023 GDP growth and 4.0% in 2024.
China policymakers continue to unveil a variety of stimulative measures, with the latest being a 25bps cut in RRR from the PBOC announced yesterday. This is designed to help stimulate lending, alongside official guidance to sustain lending.However, weak demand for long-term credit is also evident in the most recent total social financing figures for households and companies. Thus we feel still more stimulus will likely be required in Q4. We have pencilled in a 10bps cut in the MTF rate in October and December and a further 25bps cut in the RRR rate in November. Combined with new modest fiscal stimulation, this cushions China economy but does not really boost it. It is also worth remembering that China net export position is deteriorating and needs some help in the shape of a slow depreciation in the Yuan (here). Though China is concerned about too quick a decline causing capital flight, we feel it is willing to accept some further decline and we forecast 7.45 USDCNY end 2023 and 7.60 in H1 2024.