Overview

• Following on from weakness in October, there was little sign of improvement in underlying economic conditions in November – despite reports that electricity shortages have eased. Overall, growth in industrial production was only marginally stronger, investment trends remained extremely weak and retail sales data point to minimal consumption growth. Reflecting this, we have trimmed our economic growth forecast for 2021 to 8.0% (from 8.3% previously), while our forecast for 2022 is unchanged at 6.0% (albeit we expect marginally weaker conditions at the start of the year to be offset by stronger growth at the end).

• China’s industrial production grew slightly more strongly in November – up by 3.8% yoy – from 3.5% yoy in October. By historical standards, this was a weak rate of growth, suggesting limited gains from the reported easing of electricity shortages. With weakening trends in the construction sector over recent months, heavy industry tied to construction declined – with output of cement and crude steel falling by 18.6% yoy and 22% yoy respectively.

• Although growth in producer prices was marginally softer in November (off multi-decade highs in October) – with these price pressures flowing through into the cost of investment goods. In real terms, we estimate that fixed asset investment fell by 11.7% yoy (from 12.5% yoy previously).

• China’s trade surplus narrowed slightly in November – down from an all time high of US$84.5 billion in October to US$71.7 billion. While the value of both imports and exports rose month-on-month, imports rose more rapidly, pushing down the surplus. Prices continue to impact import and export values – reflecting a range of factors – including strong growth in commodity prices, ongoing disruptions related to COVID-19, shortages of key inputs and constraints in global shipping.

• Real retail sales increased by just 0.5% yoy (down from 1.9% yoy in October) – the weakest outcome since August 2020, and far below pre-COVID-19 levels.

• In early December, the PBoC announced another 50 basis point cut to the Reserve Requirement Ratio – the second change in 2021. This will free up around RMB 1.2 trillion for banks to expand lending – albeit an unspecified amount will be used to repay maturing medium term lending facility loans from the central bank. The PBoC has provided guidance that it is seeking to boost lending to smaller firms.

• The PBoC has held the Loan Prime Rate (its main policy rate) stable at 3.85% since April 2020. Although Chinese authorities may seek some additional stimulus to stabilise the economy in 2022, the increasing likelihood of rate rises in advanced economies (most notably the United States) may constrain the PBoC’s capacity to cut policy rates – particularly given the risk of capital outflow. This may mean a greater role for fiscal stimulus next year.

For further details, please see China’s economy at a glance (December 2021)