ChinaPulse - Increased urgency for government to stabilize growth

Key Points

Please click on download PDF above for full report

• August’s data for China's major economic indicators indicated a continued year-over-year slowdown in China’s economic recovery. Growth deceleration (year-over-year) was seen in almost all major indicators in August, including IP (-0.6ppts), service production (-0.2ppts), retail sales (-0.6ppts). FAI (ex rural) YTD contracted by 10.2%yoy, unchanged from July’s. After a 5.3%yoy growth in Q1, a 4.7%yoy growth in Q2, China GDP likely expanded at a rate between 4.5~4.7%yoy in July and August.
• Weak August’s retail sales and investment numbers, and details of loan demand by both households and corporates all suggested the weak domestic demand and weak desire for borrowing for consumption and investment. And such weak sentiment was largely related to persisting weak performance of property sector.
• With sequential change of major activity indicators ranging between -3.5%mom to +3.5%mom, and large year-over-year contraction, as well as continued decline in property prices, the sector is still finding its bottom. Efforts are much needed to help stabilize it.
• Market’s reaction has been negative, towards domestic economic performance implied by recent data releases and government actions. Shanghai-Shenzhen CSI 300 index declined by almost 9% in past two and a half month to current 3,159 level. And portfolio investment has been rushing into safe assets and pushing China 10-year government bond yield to 2.07%.
• China’s growth benefitted from resilient external demand so far this year. There, in fact, existed a big contrast between a healthy external demand for Chinese production and a quite weak (er) domestic demand in Chinese economy in recent months. However, a decelerated US economic growth would mean a weaker China exports outlook ahead. Potentially more intense deflationary pressure due to the rising surveyed unemployment and negative wealth effect (stock market price and property price declines) require government to roll out further easing measures to revert such downward pressure on the economy.
• USD/CNY. In near term, USD/CNY movement likely continues to be largely driven by external factors and Fed’s action could bring volatility, however, as we do expect further policy stimulus from government to help stabilize growth, should it happen, CNY likely strengthens on it.