China data preview: Production down, FAI up
- We expect retail sales to slow to 2.6%yoy in August
- Industrial production is projected to be 3.5%yoy (from 3.8%)
- Fixed asset investment is expected to rise 6.0% in the first eight months, up from 5.7% up to July
Market volatility has intensified in recent weeks due to Covid flareups, power shortages, and geopolitical tensions. August data -- to be released Friday -- will shed more clues ahead.
Retail sales are forecasted to moderate to 2.6%yoy in August from July’s 2.7% as the rebound in demand post-Shanghai lockdown ebbed. Shopping voucher initiatives had limited effect because consumption accounts for a tiny share of overall spending. Shanghai, for instance, began distributing RMB1bn worth of electronic coupons in late August, which is a mere 0.06% of total retail sales of RMB1,808bn in 2021. And the giveaway was insufficient in offsetting the drop in income growth. The average per capita income growth over the five years preceding the pandemic was 6.7%, which had fallen to 3.0% in 1H. Meantime, the uptick in July’s average working hours may prove short-lived as 33 cities have since been fully or partially locked down. Elsewhere, August’s services PMI fell for a 2nd straight month.
Factory activities are likely to have slowed in August – much more notable than the retreat in retail sales – as production was bearing the brunt of the power shortage in Sichuan. The southwestern province accounts for more than 4.0% of China’s industrial output, the eighth largest amongst 31 provinces. Power rationing introduced in neighborhoods created additional havoc.
Early indicators paint a negative picture. August’s manufacturing PMI came in at 49.4, with energy-intensive sectors, chemicals, textiles, and non-metal minerals dropping below 45.0. Worse, the decline in new orders exceeded the drop in output for the 6th straight month, suggesting manufacturers may trim production further in response to weaker demand. Meanwhile, the growth of South Korea’s exports, a barometer of regional activities, slowed to 6.6% from 9.2% in July.
Fixed asset investment
On a brighter note, infrastructure investment is gathering steam. RMB3.5tn worth of special bonds issued through August was deployed as instructed by Premier Li Keqiang. On top of that, RMB300bn in funds has been distributed through a policy bank financing program. Much of the investment has been geared towards electrical machinery, telecommunications, healthcare facilities, water conservancy, and power generation to foster quality growth.
Inner regions have more aggressive spending plans, with Hubei, Xinjiang, and Ningxia recording double-digit growth in FAI year to date. Such a trend will continue thanks to the government’s strategy of reducing regional growth inequality. On the contrary, property investment will likely contract for the 5th month as builders grappling with liquidity stress and slumping sales have postponed or cancelled projects. Taken together, we estimate fixed asset investment growth at 6.0% in January-August.
Fragile recovery warrants continuing policy support. The soft CPI print for August (2.5%) suggests inflation does not impede monetary easing. But it remains to be seen whether PBOC would deliver another cut quickly after last month’s reduction. The efficacy of monetary policy is another concern. The growth of aggregate financing since April has been slower than the money supply.
Bill financing and short-term loans primely drove corporate loans year to date, while contraction of long-term loans persists. Weak capital spending stems largely from uncertainty over sporadic Covid outbreaks and property sector stress. Ample cash conditions have pushed front-end money market rates substantially below the 7D reverse repo policy rate. A rate cut this week would have minimal effect.
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