China in Focus: Economy on firmer footing
19 Dec 2023
Consumption remains a key pillar of growth and is likely to sustain momentum in the coming quarters
Meanwhile, policymakers have announced a range of measures which should help to stabilise the property sector
Retail sales rose by 10.1% y-o-y in November, partly helped by a relatively low base last year. Services consumption remained strong as services-related retail sales rose by 19.5% y-o-y year-to-date through November while catering sales rose by 25.8% y-o-y. There are also signs that services consumption strength is broadening out: durable goods demand has picked up as communication appliances rose by 16.8% y-o-y and auto sales rose by 14.7% y-o-y.
Industrial production grew 6.6% y-o-y in November on the back of strong manufacturing activity, particularly in automobile productioin (+20.7%), as well as other high-end technology sectors such as electrical machinery (+10.2%), and computer and communications (+10.6%). Indeed, policy support for auto demand, particularly electrical vehicles, has been conducive for related manufacturing.
Fixed Asset Investment was unchanged from last month, rising 2.9% y-o-y in November. The divergence between industries continues. For one, manufacturing investment picked up, while infrastructure investment held steady at a growth rate of 8.1% y-o-y. This has been helped by a renewed fiscal policy push including from RMB1trn of treasury bond issuance for disaster prevention and mitigation announced in October this year.
CPI inflation fell by 0.5% y-o-y in November, dragged down by food prices, which contributed 0.64ppt of the decline. The weakened activity in the property sector likely weighed on broader sentiment, while the fading impact of the holidays also softened the pace of some related service prices. Meanwhile, PPI inflation fell 3.0% y-o-y, weighed down by lower global commodity prices, a weak property sector, and some passing on of cost savings to end-consumers.
Export growth returned to postive territory in November, up by 0.5% y-o-y, as base effects helped to mask the ongoing softeness in global demand. Meanwhile, import growth fell back into contraction in November, dropping 0.6% y-o-y, despite a low base and indicating still wobbly domestic demand. We think the recent weakness in the property sector has played a role as demand for key construction materials saw a softer pace of growth.
We expect the recovery to further broaden out
We have turned more positive on China’s growth prospects following recent strong activity readings and a more proactive policy stance. We expect the recovery to further broaden out and for more policy support to stabilise the property sector, as well as to help resolve local government debt overhang. While the new housing development model is promising, more concerted action by policymakers and timely implementation will be critical to avoid an even larger stabilisation cost. Long-term growth will also remain the focus as the government aims to balance addressing structural concerns, such as elevated local government debt, with growth opportunities in innovation-led sectors and green development.
Consumption growth is the bright spot
Consumption has continued to be a key driver for growth throughout the year (see Chart 1) and is likely to underpin sustained momentum in the coming quarters. Services-related retail sales have grown at 19.5% in the first 11 months of 2023, far outpacing still healthy overall retail sales growth of c7%. The robust performance of the service sector has boosted spending power and consumption among lower income groups in particular. But, for a more holistic economic recovery, it’s essential for this momentum to broaden out, enhancing business confidence, and stimulating more spending in higher income brackets. That way, the cascading effect would strengthen the overall economic recovery, especially given weak external demand. There are some green shoots as industrial production has stayed buoyant, but policy support is needed for steadier growth.
Policy measures could stability the property market
The most pressing issue is to stabilise the property market, though improvement of secondhand home sales in large cities recently may be an early indication of hope (see Chart 2) after a challenging phase of continued property market stress. New primary home sales have fallen by double digits y-o-y since June, which has weighed down the entire property sector value chain. The government is transitioning towards a new dual-track housing model, with a larger government-led social housing sector complemented by a commercial real estate sector largely under market forces. A myriad of property policy measures, if implemented timely and on a meaningful scale, should lead to stabilisation: increased government support through directing funding for local governments to absorb excess capacity such as through pledged supplemental lending facilities (PSLs), the greenlighting of funding support for healthy developers and easing of home purchase restrictions to unleash demand in large cities.
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