External demand in October reclaimed its status as a bright spot in the economy. Industrial production remained resilient, backed by resilient exports growth and old equipment upgrade. Consumption sentiment improved in leisure spending, but big-ticket items remained subdued. Reflecting the feeble growth momentum, fixed asset investment and loan growth were lacklustre. The weakening growth momentum calls for further easing. We expect the strong stimulus measures, from rate cuts to public outlays, since September will help the economy maintain 5.0% growth in 2024 and 2025. (China 2025 Macro outlook: Stimulus to offset weak demand and trade)

1. Trade

Resilient external trade stayed as a bright spot in October. Exports growth increased from 2.4% YoY in September to 12.7%, resulting in a 5.1% YoY YTD.  Major products such as high-tech products, electronics, and automobiles had all recorded a year-to-date improvement during the month. Aligned with the uptick of exports shipments, both SME exporter- focused Caixin and official manufacturing PMI also rebounded back to expansion territories in October.

Notwithstanding there are several risks facing Chinese exporters. The paramount one is the elevated trade tension. The new US Administration will likely raise further tariffs against China. Yet, the actual impact may prove even less severe. First, it will take time for the US to execute the additional tariff by phase if it happens. Also, the new US administration is likely to raise tariff on other countries, which could dilute the specific effect on China. Additionally, China is better positioned to withstand the protectionist climate compared to the past. Burgeoning demand from emerging markets may help cushion the potential loss of trade income from the US. The loss of trade income from the US may be partly offset by the stimulus. Lastly, there might be front loading of export orders in 2025 similar as Trump’s first term, as a result export from China to the US may still be resilient.

2. Industrial production

Resilient Industrial activities supported by the uptick in external trade. Industrial production slightly decreased from 5.4% YoY in September to 5.3%, with YTD growth stayed at 5.8%. External demand on key products lifted the EV and integrated circuit production by 36.3% and 24.8% in October, respectively. Industrial robotic also surged 13.3% during the month amid old equipment renewal initiatives.

3. Fixed asset investment

Headline fixed asset investment (FAI) growth remained at 3.4% YoY YTD in October. State sector investment, as the key driver of FAI growth, slightly improved to 6.2% YoY YTD. Utility and infrastructure investment are leading the march. Investment in equipment and tool purchases increased 16.1% YoY YTD in October. The contraction of 0.3% in private sector remained as key drag in FAI.

4. Property

Real estate investment was a drag, down 10.3%yoy, ytd, with residential floor space starts decreasing 22.6%yoy. Property developers are prioritizing the completion of unfinished homes, resulting in a relatively smaller decline in completed floor space. However, decline in primary market sales in 300 cities narrowed from -26.8%yoy in September to -1.0% in October. Such improvement should ease the record high 31.9 months of residential inventory as of September.

5. Retail sales

Retail sales growth accelerated from 3.3% YoY in first nine months to 3.5% YTD in October. The consumption sentiment saw signs of stabilization on stimulus measures. Spending on leisure and cosmetic jumped by 26.7% YoY and 40.1% respectively. Household electronic appliances also rose by 39.2%.

That said, negative wealth effect from asset markets continue to cloud consumption sentiment. Sales of big-ticket items, luxuries, and construction materials fell further. Hopefully the CNY300 billion consumption upgrading subsidy, equivalent to 0.6% of retail sales, will cushion the downtrend.

6. Money supply

Persistently weak aggregate demand indicates need for further loosening of monetary policy. This is evidenced by the deep contraction in M1 of 6.1% YoY in October. Meanwhile, M2 growth rebounded from an all-time low of 6.2% in June to 7.5% YoY. The gap between short-term M1 and time deposit M2 growth widened to 13.6 percentage points, hovering at around the highest level since May 2012. It implies households and corporations are unwilling to hold liquid cash for consumption and investment. However, it is worth to note, both M1 and M2 growth showing the initial signs of bottoming out as a result of ongoing stimulus.

7. Loans

Weak credit demand is a concern. Loan growth further slowed from 8.5% YoY to historical low of 8.1% YoY in September. Mid- to long-term household loans growth, most known as mortgages, dropped 45% YoY in the first ten months amid falling property prices. On corporate loan front, pressure remains on new corporate borrowing amid high real financing costs, with new medium- to long-term loans dropping 18.7% YoY YTD last month.

8. Inflation

Modest inflation leaves room for further rate cut. Consumer price index dropped further from 0.4% YoY to 0.3% in October. Transportation and Communication were the major drag amid oil price decline. Rent also dropped for its 7^th consecutive month. Core CPI, excluding food and energy increased to 0.2%, indicating weak consumer spending sentiment persists. The decrease in producer prices also expanded from -2.8% YoY to -2.9% in October due to sluggish domestic demand.

9. Conclusion

Strong stimulus measures, from rate cuts to public outlays, have been the hallmark of China’s policy stance since September. This ought to help the economy maintain 5.0% growth in 2024 and 2025. China's economy will continue facing risks though, from property market to strained local government finance, from persistently weak aggregate demand to a very likely escalation of trade and tech war. We see room for a 10bps 1Y LPR cut in this quarter, and another 50bps cut in 2025.


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