China data preview: GDP gain masks underlying weakness
- We project real GDP to have expanded 3.5%yoy in 3Q, up from 0.4% in 2Q
- September’s retail sales may have slowed to 3.5%yoy (from 5.4% in August)
- Industrial production is projected to be 4.9%yoy (from 4.2%)
- FAI is expected to rise 6.0%yoy in the first nine months (up from 5.8% up to August)
A rebound in industrial activity and infrastructure spending suggests the economy is growing faster in 3Q after stalling in 2Q due to the Shanghai lockdown. Still, weakness in private and external demand means the pace of growth is likely to be well below the trend. President Xi Jinping defended an unwavering commitment to Beijing’s zero-tolerance policy during the opening ceremony of the 20th Party Congress on 16 October, a signal that Covid restrictions would continue even at the cost of growth.
Retail sales rose 5.4%yoy in August, partly due to a favorable base effect. On a monthly basis, it contracted by 0.05% after shrinking by 0.12% in July. Several indicators point to weaker consumption in September. Service PMI slipped to 48.9 from 51.9 in August, with contact-intensive sectors such as transportation, catering, and hotels facing severe difficulties due to Covid curbs. The number of domestic trips taken over the Mid-Autumn Festival dropped 16.7%yoy, while tourism spending fell 22.8% (-39.4% compared with pre-pandemic levels in 2019). Mirroring this was a sharp contraction in box-office revenue and domestic flights. With the boost from tax cuts fading, car sales growth decelerated to 25.7% from 32.1% in August. High-frequency data covering the week-long National Day break (1-7 October) indicate further weakness ahead.
Factory activities edged up in September, thanks to relief from power shortages in Sichuan reducing production disruptions. The southwestern province accounts for more than 4.0% of China’s industrial output, the eighth largest among 31 provinces. The early indicator is slightly positive, as evidenced by NBS manufacturing PMI rising to 50.1 in September from 49.4 the previous month. Sub-index tracking new orders, however, remained well below output, suggesting production cuts ahead. Overseas orders are ebbing amid rising prices, weakening demand, and destocking after inventory buildup peaked. This is evident in the sharp fall in freight rates for goods transported from China to North America and Europe.
Fixed asset investment
The NBS construction PMI surged to a 1-year high of 60.2 in September. This, coupled with higher steel output and lower rebar inventories, signals infrastructure spending may have offset the projected decline in property investment and driven headline FAI higher. Local governments are eager to shore up dwindling growth before the Party Congress. Shanghai, for instance, announced eight infrastructure projects with a total investment of RMB1.8tn. The move came in response to sharp contraction stemming from the monthslong lockdown (Shanghai’s FAI plunged 11.5% YTD vs. an 8.3% gain nationwide). China’s aggressive infrastructure push has exacerbated the performance differential between private and state-owned enterprises. The former saw their profits sink 8.3% YTD, while those of the latter were up 5.4%.
As of July, local governments had issued most of the RMB3.65tn in special bonds earmarked for infrastructure. Government bond financing, as a result, dropped 52%yoy in August-September. We expect large state-owned and policy banks to step up credit support to offset the shortfall. Meanwhile, PBOC injected funds into policy banks via the Pledged Supplemental Lending (PSL) program for the first time since February 2020. It suggests the authority’s pivot to a more targeted policy because broad-based monetary easing is constrained by rising global interest rates and fiscal spending limited by stretched local government finances (see here). We see room for a further increase in PSL in the coming months alongside other targeted measures stabilizing the property market and prioritizing job creation.
To read the full report, click here to Download the PDF.
The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). This report is intended for “Accredited Investors” and “Institutional Investors” (defined under the Financial Advisers Act and Securities and Futures Act of Singapore, and their subsidiary legislation), as well as “Professional Investors” (defined under the Securities and Futures Ordinance of Hong Kong) only. It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies. The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation. The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation.
This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) which is Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Singapore recipients should contact DBS Bank Ltd at 65-6878-8888 for matters arising from, or in connection with the report.
DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E.
DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability. 18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.
DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability. 13th Floor One Island East, 18 Westlands Road, Quarry Bay, Hong Kong SAR
Virtual currencies are highly speculative digital "virtual commodities", and are not currencies. It is not a financial product approved by the Taiwan Financial Supervisory Commission, and the safeguards of the existing investor protection regime does not apply. The prices of virtual currencies may fluctuate greatly, and the investment risk is high. Before engaging in such transactions, the investor should carefully assess the risks, and seek its own independent advice.