- Industrial activities slowed further amid weakened domestic demand.
- Investment growth dragged by the decline in private and real estate investment.
- Weak credit demand, modest inflation, and consumption sentiment are calling for another rate cut.
- Implications for our forecast: We expect a 10 bps LPR cut in 4Q.
Economic activities saw a further slowdown in August. Despite stronger growth in exports, industrial production continued to decelerate, amid sluggish domestic demand. Consumption sentiment remained subdued amid higher unemployment rates. Reflecting the weak growth momentum, fixed asset investment and loan growth were lacklustre.
1. Trade
External trade remained the backbone of economic growth so far this year. Export growth accelerated from 7.0% YoY in July to 8.7% in August, resulting in a 4.6% YoY YTD. The momentum aligned with the rebound of the SME exporter- focused Caixin Manufacturing PMI, right after a month of contraction. High-tech products, electronics, and automobiles were among the top-performing export products.
However, the decline in steel export in value term contrasted with its strong volume growth of 20.6%. This suggested sluggish domestic demand and the property rout led to destocking in commodities-related products. Such demand also explained the moderated imports growth of 2.5% YoY YTD.
2. Industrial production
Industrial activities were receiving a similar drag from weakened domestic demand. Industrial production further slowdown from 5.1% YoY in July to 4.5% in August, with YTD growth decelerated to 5.8%. Building materials such as iron, steel, and cement were down -4.3%, -3.3% and -10.7% YoY YTD, respectively. Oil refinery production also contracted.
3. Fixed asset investment
On investment front, headline fixed asset investment (FAI) growth decelerated from 3.6% to 3.4% YoY YTD in August, dragged by the contraction of 0.2% in private investment. State sector investment, as the key driver of FAI growth, also slowed to 6% YoY YTD, alongside with Tech hardware, infrastructure and manufacturing.
Real estate investment was a major drag, falling 10.2% YoY YTD with residential floor space starts decreasing 23.0%. Property developers are prioritizing completion of unfinished homes, resulting in a relatively smaller decline in completed floor space.
4. Retail sales
Regarding consumption, retail sales growth decelerated from 3.5% YoY in first seven months to 3.4% YTD in August. Sales of big- ticket items including automobiles, luxuries, and construction materials were muted. Even growth in leisure expenditures on areas like sports and entertainment slowed. The climbing unemployment rate and negative wealth effect from asset market declines will persist in dampening spending confidence.
5. Money supply
Tight liquidity conditions in the system warrant additional monetary easing. Broad money supply growth declined from a peak of 12.7% YoY in March 2023 to 6.6% in August 2024. The contraction in M1 money supply deepened from -6.6% YoY in July to -7.3% in August. The weaker propensity to hold short-term deposits signals low investment and consumption confidence.
6. Loans
Weak credit demand is a concern. Loan growth further slowed to 8.5% YoY in August, slowest growth in two decades. Corporate borrowing continued to be subdued owing to high real financing expenses, with new medium- to long-term loans falling 18.1% YoY last month. Household borrowing, a gauge of mortgages, also further shrank 15.6% versus the previous year, indicating the economic slowdown.
7. Inflation
Modest inflation leaves room for further cut rate. Consumer price index rose marginally from 0.5% YoY to 0.6% in August. However, this slight increase was largely attributed to low base comparison from food prices. Core CPI, excluding food and energy, dropped to a 3-year low, indicating a weak consumer spending sentiment. The decrease in producer prices also expanded from -0.8% YoY to -1.8% in August due to sluggish domestic demand.
8. Conclusion
The People's Bank of China (PBOC) is expected to hold the 1-year MLF rate unchanged at 2.30% and 1Y LPR at 3.35% later this week. Policymakers are awaiting the effects of recent stimulus measures after the cut in August. However, 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 could take a breather.
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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
[email protected]
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