China: A more balanced recovery from August data

August data showed that the economic recovery made more headway.
Nathan Chow15 Sep 2020
  • Industrial production grew again in August for the fifth straight month
  • Retail sales registered its first post-lockdown expansion
  • Implication for our forecast: We continue to expect GDP to expand by 5.4% in 3Q
  • Implication for investors: Data in August have decreased the odds…
  • … of a rate cut by the PBOC on 20 September
Photo credit: AFP Photo

August data showed that the economic recovery made more headway. Factories hummed at a faster clip following a recovery in infrastructure spending and external demand. Retail sales registered its first post-lockdown expansion.

Growth in industrial production accelerated to 5.6% YoY from 4.8% in July. Production by state and private companies both picked up speed, while those by foreign companies eased. Several industries including machineries and pharmaceutical saw a further gain in output growth. Auto production expanded for a fifth month in a row with 14.8% YoY expansion.

The leading indicator has pointed to a steady recovery ahead. The oil refinery run rate in the week ended 11 September was 16% above pre-pandemic levels. An improvement in the global economy will also help. Manufacturing PMIs in the US and euro-area continued to expand, while ASEAN’s contraction narrowed.

Retail sales expanded for the first time this year by 0.5% YoY in August. Consumer staples such as beverages and daily use articles continued to see robust expansion. Encouragingly, some non-essential goods including automobiles, cosmetics, and jewelry registered growth of 11-19%, a sign of strengthening consumer confidence.

We believe the upward trend in consumption will be sustained. The weekly tally of new COVID-19 cases in mainland China fell to 46 in the week ended 11 September, down from 100-plus in mid-August and 500-plus at end-July. Social-distancing measures were relaxed further e.g. cinemas have reopened after six months.

Fixed asset investment shrank 0.3% YoY YTD in August from -1.6% contraction in July. The expansion in public investment slowed to 3.2% from 3.8% while the contraction in private investment narrowed to -2.8% from -5.7%. Infrastructure investment continued to recover; its YoY decline narrowed by 0.7%ppts to -0.3% in August.

New-infrastructure investment such as "computer & telecommunication" advanced at a firm clip, spurred by Beijing’s push for self-reliance in technology. Meanwhile, transportation investment quickened to 1.7% from 0.9% previous month. Surging credit impulse and rising PMI construction index indicate continued support from government infrastructure spending in coming months.

Today’s release has reinforced our view for the recovery ahead, which in turn, has decreased the odds of a rate cut by the PBOC on 20 September.

But challenges abound. The worst flooding in decades has caused more disruptions to the local economy. The direct economic loss here was estimated to be RMB180bn as of mid-August, 16% higher than the 2015-2019 average. The pace of overseas recovery is uncertain because the pandemic has yet to be contained in some major economies. Strained tensions with the US in the lead up to the US presidential election in November could cause market volatility and setbacks for production. We expect the PBOC to keep monetary policy flexible. A RRR cut is still possible in the face of tight liquidity and mounting government bond supply. Slowing inflation should give the authority more room for manoeuvre in 4Q.

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Nathan Chow


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