China data preview: GDP gain masks underlying weakness

We expect GDP growth to rebound to 3.5%yoy in 3Q from 0.4% in 2Q.
Group Research, Nathan Chow17 Oct 2022
  • 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)
Photo credit: AFP Photo

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

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.

Industrial production

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%.

Policy implications

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.

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Nathan Chow 周洪禮

Senior Economist and Strategist - China & Hong Kong 高級經濟學家及策略師 - 中國及香港

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