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China’s economy shows more signs of stabilising on policy boost

China’s economy shows more signs of stabilising on policy boost
Visitors queue to enter the Palace Museum at the Forbidden City in Beijing, China, on Sunday, 13 August 2023.

China’s economy picked up steam in August as a summer travel boom and a heftier stimulus push boosted consumer spending and factory output, adding to nascent signs of stabilisation.

Industrial production and retail sales growth jumped last month from a year earlier, far exceeding expectations, while the urban jobless rate eased slightly. That improvement came as the government has in recent weeks beefed up pro-growth measures, including plans to spur more spending on home goods and ease curbs on some housing purchases. 

“Perhaps the peak pessimism is behind us,” said Ding Shuang, chief economist for greater China and North Asia at Standard Chartered Plc. “August’s data indicates that the economy is unlikely to suffer from a persisting, deeper downturn going forward even though there might still be some volatility ahead — especially if we take into account the policy factor.”

Stocks reacted positively. A gauge of Chinese stocks listed in Hong Kong extended gains to as much as 1.6% after the data, while the CSI 300 Index on the mainland was little changed. The onshore yuan jumped as much as 0.5%, set for its best weekly advance since January, and the 10-year government yield climbed.

Optimism is slowly building among some investors that Beijing’s recent efforts to boost the economy and financial markets are starting to bear fruit after a brutal selloff in August that saw foreign funds sell a record amount of onshore China stocks.

Even so, it’s early days — and a single month of data isn’t enough to confirm a sustained recovery trajectory. There have been other signs that this year’s initial spurt of spending activity has begun to moderate, and the ongoing crisis in the real estate sector continues to be a challenge. 

Not all of Friday’s figures were rosy, either: Fixed-asset investment grew 3.2% in the first eight months of the year from the same period in 2022, slowing from the increase in January-to-July as the decline in property investment worsened.

The rate of growth in infrastructure investment also eased slightly, even as Chinese provinces accelerated the pace at which they issued special bonds used to finance infrastructure projects. That suggested the funds have been slow to trickle through and impact growth.

“We also need to see that there are still a lot of uncertainties and instabilities externally, and domestic demand still appears insufficient,” the NBS said in a statement accompanying the data.

Before Friday’s data, earlier indicators showed manufacturing inching toward expansion last month, while credit demand recovered and deflationary pressures eased slightly.

But a bump in home sales in big cities following the announcement last month of some property easing measures has already faded. Home prices, meanwhile, dropped at a faster pace in August than in July.

And while consumers have been spending on services like travel and eating out, there is doubt about the sustainability of that spending. The job market outlook is also gloomy, adding to strains.

Some economists expect the government to continue rolling out policies to support the economy and ensure it can eventually turn a corner. 

Before the data was published on Friday, the People’s Bank of China cut the amount  of cash lenders must keep in reserve for the second time this year and injected a net 191 billion yuan ($26.2-billion) via its one-year policy loan medium-term lending facility into the interbank market.

The moves help increase the ability for banks to buy bonds and support government spending. They will also make it easier for lenders to meet demand for cash in the lead up to the nation’s upcoming Golden Week holiday.

What Bloomberg Economics says … 

“Upside surprises in China’s August activity suggest the economy’s slump may be starting to bottom out. But it’s too early to call a recovery. Production and consumption are still running below historical trends in sequential terms. Weakness is evident in many other sectors — particularly property. Recent policy support may be helping but more is needed. We still expect further measures aimed at supporting growth.”

— Chang Shu and David Qu, economists

“The government will not stop beefing up policy support when the economy starts to show signs of improvement this time around,” Ding of Standard Chartered said. He pointed out that in its statement about cutting the RRR, the central bank said it intended to consolidate support for the economy so it can rebound in a sustainable way.

“Policy easing will continue for some time,” he said, expecting a 10 basis point policy rate cut in the fourth quarter.

Key figures from the data:

  • Industrial output rose 4.5% from a year earlier, higher than estimates
  • Retail sales jumped 4.6%, also above estimates and above July’s 2.5% gain year-on-year
  • Fixed-asset investment grew 3.2% in the first eight months of the year from the same period in 2022
  • Property investment slid 8.8% in the January-to-August period
  • The urban unemployment rate was 5.2% in August, slightly lower than the previous month

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