- Industrial activities slowed on both moderating domestic and external demand.
- Subdued private and real estate investment continued to be offset by public spending.
- Weak credit demand, modest inflation, and consumption sentiment call for another rate cut.
- Implication for our forecast: We expect a 10 bps LPR cut in 4Q.
- Implication for our forecast: We expect the USD/CNY to stay around 7.12 in the rest of 2024.
Economic activities saw broad-based slowdown in July. Consumption sentiment was subdued amid higher jobless rates. Industrial production growth eased due to both tepid domestic and external demand. Mirroring the weak growth momentum, fixed asset investment and loan growth were lacklustre.
Industrial production
Industrial production was up 5.9% in Jan-Jul. Automobile production and solar battery production fell by 2.4%yoy and 0.8%yoy in July amid overcapacities. Oil refinery and thermal power production also contracted. On external front, 3-month moving average export growth picked up, but manufacturing PMIs point to slower export growth in the months ahead. Notably, SME exporters focused Caixin Manufacturing PMIs contracted for the first time in the past 8 months.
Fixed asset investment
Headline fixed asset investment (FAI) growth eased to 3.6%yoy in Jan-July, dragged by the decline in real estate investment. Public investment remained as the key growth driver. Investment in railway, shipbuilding, aerospace and other transportation equipment manufacturing increased 30.1% YTD. Computers, communications, and electronics also performed well.
Real estate investment was a major drag, falling 10.2% YoY YTD. Residential floor space starts decreasing 23.7%. Property developers are prioritizing completion of unfinished homes, resulting in a relatively smaller decline in completed floor space.
Retail sales
On the consumption front, retail sales growth slowed from 3.7% YoY in 1H to 3.5% in Jan-Jul YTD. Big-ticket sales such as automobiles, luxuries, and construction materials were subdued. Even growth of leisure outlays like sports and entertainment eased. The rising unemployment rate and negative wealth effect from asset market will continue to cloud the spending confidence.
Money supply
Tight system liquidity conditions warrant RRR cuts and LPR/MLF cuts most likely in 4Q. Broad money supply growth dropped from a peak of 12.9% YoY in February 2023 to 8.7% in July 2024. Contraction of M1 extended from -5.0% in June to -6.6% in July. The weaker willingness to hold short-term deposits indicate low investment and consumption confidence.
Loans
Credit demand weakened, with loan growth remaining below the 5-year average of 11.9% at 8.7% in July. Corporate borrowing remained muted due to high real funding costs, with new medium- to long-term corporate loans dropping 17.7% YoY. Household borrowing, an indicator of mortgages, also contracted 14.6% YoY, reflecting the slowdown.
Inflation
Modest inflation leaves room for further cut rate. The overall CPI increased slightly from 0.3% YoY in June to 0.5% in July. However, this marginal improvement was mostly due to low base comparison from food prices. The core CPI, which excludes food and energy, fell to 1 year low of 0.4% YoY, reflecting weak consumer spending sentiment. Factory gate prices also stayed negative at -0.8% YoY in July due to lacklustre domestic demand.
Conclusion
We expect the People's Bank of China (PBOC) is to hold the 1-year MLF rate unchanged at 2.30% next week. Policymakers are awaiting the effects of recent stimulus measures after an off-scheduled 20 bps cut couple weeks ago. That said, the weakening growth momentum calls for further easing. The window for benchmark rate cut has emerged as major central banks are proceeding with rate cut cycles. The CNY exchange rate could take a breather. We expect the USD/CNY to stay around 7.12 in the rest of 2024.
To read the full report, click here to Download the PDF
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
[email protected]
To unsubscribe, please click here.
Topic
Explore more
E & S FlashGENERAL DISCLOSURE/ DISCLAIMER (For Macroeconomics, Currencies, Interest Rates & Digital Assets)
The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). 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.
[#for Distribution in Singapore] 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. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. 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. 11th Floor, The Center, 99 Queen’s Road Central, Central, 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.