Signs of a stabilizing economy

Key Points

• Sequential growths of key macro indicators including IP, retail sales, FAI and property investment improved in August. That said, year-over-year growths were mixed: while industrial production and retail sales delivered higher and better-than-expected growth on policy support, FAI YTD growth decelerated.
• Manufacturing and infrastructure investments supported the overall FAI in August, while the property investment continued to drag.
• Large year-over-year contraction in property sales and source of funds for real estate sector indicated the challenges the sector faced last month. Look forward, even with the accommodated policies issued lately, the higher inventory and higher credit spread between private and SOE enterprises and etc suggest there still exists obstacles in a trend recovery of the real estate industry.
• We expect a continued recovery of retail sales, due to improvement in labour market, e.g., the 0.1ppts decline in surveyed urban unemployment rate, and the 0.4ppts decline in the unemployment rate of the migrant population with agricultural household registration in August. But, the overall pace of retail sales recovery will remain modest when property sector still is a drag and takes time to turn around.
• August CPI and credit data signalled the still weak domestic demand, demand in general and demand for medium- and long- term credit in particular. We see the needs for either/or further rate cuts and RRR cuts, as well as more industrial level policy easing and implementation to happen in remaining this year.
• USD/CNY, in near terms, still is a function of sentiment and USD movement, in medium term, we still expect the CNY to strengthen to 7.1 by the end of 2023.

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KEY ECONOMIC ACTIVITIES ROSE ON A MONTH-OVER-MONTH BASIS IN AUGUST

Source: CEIC, MUFG GMR

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PBOC CUT RRR AND FOREX RRR IN SEPTEMBER TO SUPPORT THE ECONOMY AND THE YUAN

Source: Bloomberg, MUFG GMR

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MUFG PERIOD-END FORECASTS

Source: Bloomberg, MUFG GMR