China: Unbalanced Growth
· The slowdown in China retail sales continues, with excess production still evident. Nevertheless, the slowdown in industrial production and private sector business investment suggests that companies are becoming less upbeat about domestic demand. Underlying growth is 4.0%, though we see new fiscal measures delivering 4.5% GDP growth in 2026.
The October monthly numbers from China paint a picture of an unbalanced economy. Key points include.
· Production growth exceeding domestic demand. Industrial production at 4.9% continues to exceed retail sales that grew 2.9% Yr/Yr. Households remain cautious with housing wealth hits and slow employment and wage growth, while the impact of government trade in programs is fading. However, it is interesting that the trend in industrial production is slowing, with the expectations for October having been a 5.5% Yr/Yr rise and September’s 6.5% growth. This comes after the recent weak export data, which reflects the front loading of exports earlier in the year. It could be that companies are starting to slow production growth. Even so, production exceeds domestic demand and this keeps underlying disinflation pressures (here).
· Negative fixed investment. -1.7% Yr/Yr YTD versus -0.8% expected, led by a further decline in residential property investment (-14.7% Yr/Yr YTD). However, private business investment has also been weak, due to sluggish consumer spending and competition from excess supply. Finally, the government has had troubles in investment spending, partially due to weather. However, government investment can improve in November and December, with the extra Yuan500bln announced in October. Even so, the investment weakness is a worrying sign. The momentum into 2026 is around the 4.0% mark for GDP growth.
· Moderate stimulus for 2026. However, PBOC are reluctant to cut interest rates further, as it would undermine banks profitability and potentially lending. We see no 7 day reverse repo rate cut in the remainder of 2025 and only 10bps in Q2 2026. Re fiscal policy, we could see some new measures for 2026 announced in late 2025 and March 2026. These will likely be moderate rather aggressive and around Yuan2.5trn. This should help achieve 4.5% growth in 2026.