China an Uneven and Uncertain Recovery to Trigger More Policy Support
- October domestic activity growth data had mixed results:
Industrial production (IP) and retail sales growth exceeded expectations.
Fixed asset investment (FAI) and property correction showed weakness.
- The labour market displayed signs of stabilization. The overall growth recovery post-Q2 dip appears mild and uneven, lacking a solid upward trend.
- Beijing policymakers have shown positive intent with multiple measures to boost confidence and demand. Anticipate additional policy actions, with attention on signals from the Politburo meeting and Central Economic Work Conference in early to mid-December for insights.
October data mixed, with retail sales beat but FAI weakened.
China's October domestic activity growth data exhibited a mixed picture, featuring notable increases in industrial production (IP) and retail sales growth, surpassing market expectations. However, year-to-date (YTD) fixed asset investment (FAI) growth unexpectedly decelerated. Despite the recent policy easing, key indicators in the property sector continued to contract, showing little sign of stabilization.
In major cities, the unemployment rate continued its decline, returning to pre-Covid levels. This suggests that consumption demand may be relatively resilient at present, but the sluggishness in investment demand persists due to the ongoing drag from the property sector.
Aligned with other macroeconomic data released earlier in the month, the overarching message is that the growth recovery since Q3, following the dip in Q2, remains mild and uneven, lacking a clear upward sequential trend. The persistent drag from the property sector and external demand weakness contribute to this trend. To address weak growth expectations and manage deflationary risks, a collaborative approach in both fiscal and monetary policy, with a specific focus on the property sector, is deemed necessary for China.
More policy support on the way after recent positive signs
Beijing has signalled a commitment to boosting confidence and stimulating demand through a series of policy measures, reflecting a positive outlook. Anticipating further actions, I’m closely monitoring policy signals expected from the Politburo meeting and Central Economic Work Conference in early to mid-December.
Fiscal support is likely to extend into 2024, following Beijing's rare mid-year adjustment of the fiscal budget deficit ratio for 2023 and the approval of larger local government refinancing bond issuance. This move aims to bolster infrastructure spending and address local debt risks.
The People's Bank of China (PBoC) injected RMB600bn liquidity through its MLF auction, the most significant injection since December 2016. This underscores the PBoC's intention to accommodate year-end liquidity needs and support the government bond issuance pipeline. Forecasts include an expected 25bp RRR cut in the coming weeks, with potential for further policy rate reductions by 30bp by the end of 2024. Additionally, an expansion of targeted lending facilities, including PSL (pledged supplementary lending), is likely to enhance support for housing, infrastructure projects, and stabilize the property sector.
China's efforts to mend ties with the US and allies have intensified, with President Xi Jinping's recent visit to the US after six years. Positive outcomes from this meeting could boost near-term sentiment and the CNH. However, a sustainable rally hinges on continuous improvements in real data, significant policy breakthroughs to amend ties in the medium term, and considerations of US rates and the USD.
Given recent favourable policy changes, a marginal sequential growth recovery is anticipated for the remainder of 2023 and into 2024, following the dip in Q2 2023. My GDP growth forecast remains at 5.1% in 2023 and 4.5% in 2024, with a perceived modest upside risk.
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