China Data Mixed, but No PBOC Cut
China monthly data looked fine on a Yr/Yr basis, but was slower on a mth/mth basis – retail sales grew 0.1% on the month. Underlying momentum is slowing into Q4 from Q3 and further policy stimulus is required if China wants 5% GDP growth in 2024. However, the PBOC did not cut the medium-term facility rate (MTF) and the next move is likely to be a selective 25bps cut in the RRR rate.
Figure 1: China Economic Surprise Index
Source: Datastream/Citibank
October data from China shows a mixed picture. Yr/Yr Industrial production and retail sales were slightly stronger than expected at 4.6% and 7.6% respectively. However, on the month industrial production grew 0.4% and retail sales a mere 0.1%. The rise in the Yr/Yr figures versus September reflects the fact that October 2022 was weak due to zero COVID policies.
The breakdown of the retail sales data is also mixed. Restaurant services remained buoyant during the October holidays and were 17.1% Yr/Yr v 13.8% in September. However, the weakness in residential property investment continues to act as a drag with furniture sales at 1.7% Yr/Yr. The separate residential property investment fell to -9.3% Yr/Yr YTD v -9.1%, which is noticeable for a YTD figure when we have had 10 months of data.
This mixed picture for the economy means that the quarterly pace in Q4 is unlikely to match Q3, though the Yr/Yr will be helped by base effects with the COVID crisis in Q4 2022.Q1 2024 GDP Yr/Yr numbers will then be more challenging, given the large jump in Q1 2023 GDP with the shift to an endemic COVID strategy.
Certainly more stimulus is required, but the PBOC did not cut the MTF rate today. We had argued that an RRR cut is more likely in November/December, with the volatility in short-dated money market rates having recently forced the PBOC to be generous in money market operations. However, a move will likely be 25bps, both given the selective easing from the authorities and as the main focus is on incremental fiscal policy support e.g. the recent Yuan1trn for local authorities infrastructure investment.