Overview

• Weakness in China’s economy that was evident in Q2 has continued into July, with indicators of domestic demand subdued, the real estate sector remaining a headwind and demand for China’s goods in export markets continuing to soften. The highly likely modest cut to the PBoC’s policy rate later this month (having cut its MTF rate in mid-August) is unlikely to provide much of a boost, given already lacklustre loan demand. While our forecasts for China’s growth are unchanged this month – 5.2% for 2023, 4.5% for 2024 and 4.8% for 2025 – risk in the near-term is becoming increasingly weighted to the downside, with a growing chance of China missing its 5% target this year.
• China’s industrial production growth slowed marginally in July – increasing by 3.7% yoy (down from 4.4% yoy in June). We are now past the period of significant base effects (related to last year’s COVID-19 lockdowns), and growth in output is relatively weak when compared with pre-pandemic trends.
• In real terms, fixed asset investment growth slowed in July to 3.7% yoy (from 6.8% yoy previously). There remains a substantial difference between nominal investment by state-owned enterprises (SOEs) – which rose by 4.9% yoy in July – and private sector firms, where investment contracted by 1.0% yoy. Statements by NBS officials indicate that real estate is the key driver of this divergence.
• China’s trade surplus increased month-on-month in July – totalling US$80.6 billion (up from US$70.6 billion in June). This uptick reflected a more rapid decline in imports than exports during the month. Trade volume data is available with a one-month lag, and shows that export volumes fell by 1.7% yoy in June. Tightening monetary policy and a shift in consumption back towards services has impacted demand for China’s exports.
• Real retail sales growth slowed in July – increasing by 2.8% yoy (from 3.1% yoy in June) – highlighting the ongoing weakness in domestic demand.
• The People’s Bank of China (PBoC) cut the rate on its Medium Term Lending Facility (MTF) by 15 basis points in mid August, to 2.5%. As China’s main policy rate – the Loan Prime Rate – is priced off the MTF, we expect the same cut to be implemented on 21 August.
• Despite this likely cut, there remain concerns around loan demand from households and businesses, particularly given that there is no shortage of funds available for lending. The reopening of China’s economy, following the abandonment of zero-COVID policies, saw an uptick in the growth of outstanding bank lending, however these measures plateaued across March and April, before subsequently declining.

For further details, please see China’s economy at a glance (August 2023)