Overview:

• There were some significant signs of weakness emerging in the latest Chinese data. In seasonally adjusted, month-on-month terms, industrial production growth slowed and retail sales fell in July. Similarly, real investment contracted steeply year-on-year. In part, this trend could be related an outbreak of COVID-19 in the second half of July. Starting in Nanjing, this Delta variant outbreak has rapidly spread to other localities, including Beijing. In response, Chinese authorities have introduced mass testing and travel restrictions, along with localised closures of events and businesses. Reflecting the impact of these measures, we have revised down our forecast for 2021 to 8.7% (previously 9.5%), while our forecasts for 2022 (5.9%) and 2023 (5.7%) are marginally stronger.

• China’s industrial production growth slowed further in July, down to 6.4% yoy (from 8.3% yoy in June). The slowdown in growth has been partly related to base effects – given the rapid recovery of China’s industrial sector from its lockdown in February 2020 through to July 2020. However, there was a notable slowdown in production on a seasonally adjusted, month-on-month basis – which could be related to the COVID-19 outbreak.

• China’s real fixed asset investment contracted in July – down by 8.2% yoy (compared with a 1.6% fall in June). Access to finance may be having an impact on investment growth. Government bond issuance has sharply contracted in year-on-year terms, and investment in infrastructure (which is largely financed by local governments) fell by 10.5% yoy in June (in nominal terms).

• China’s trade surplus expanded in July, totalling US$56.6 billion (compared with US$51.5 billion in June). The value of China’s exports was marginally higher month-on-month in July, while there was a slight decline in the value of imports.

• China’s retail sales growth slowed once again – with diminishing base effects a contributor. Real retail sales rose by 6.5% yoy (down from 9.8% yoy previously). Base effects alone do not explain the slowdown – with nominal month-on-month retail sales (seasonally adjusted) decreasing by 0.13% (compared with a 0.48% mom increase in June).

• In the first seven months of 2021, new credit issuance totalled RMB 18.8 trillion, a decrease of 16.8% yoy. During this period, bank lending continued to expand, while non-bank lending has continued to fall – down by over 46% yoy. This decline was led by falls in government and corporate bond issuance.

• The People’s Bank of China (PBoC) argues that producer price inflation is controllable and that interest rates are at “a reasonable level”. However it has flagged downside risk to the economy, which has triggered some speculation of further cuts to the Required Reserve Ratio (similar to the cut in July) or cuts to interest rates.

For further details please see: China’s economy at a glance – August 2021