Overview

• There remains considerable near term uncertainty in China’s economy, following the impact of electricity shortages in recent months. This was evident in divergent trends in China’s two major manufacturing PMIs in October. Reports suggest that shortages have been alleviated in November, via a combination of increased domestic coal production and energy commodity imports, however the prospect of a colder than average winter means additional shortage risks in coming months (more on this topic is available here). Our forecasts for China’s GDP remain unchanged – at 8.3% for 2021 and 6.0% for 2022 – however the electricity issues present some downside risks to both forecasts.
• China’s industrial production growth was slightly stronger in October – increasing by 3.5% yoy (compared with 3.1% yoy in September). However, it is worth noting that this is a weak growth rate by historical standards. Sectors closely aligned to construction fell dramatically – with crude steel and cement production falling by 23% yoy and 17% yoy respectively. Motor vehicle output also fell by 8.3% yoy. In contrast, output of electronics rose by 14% yoy.
• Producer prices have continued to accelerate – and these flow through into the cost of investment goods – which means that in real terms, fixed asset investment fell by 13.1% yoy (from a 9.7% yoy decrease previously). The downturn in real estate investment overtook that of infrastructure in October – with real estate investment contracting by 5.4% yoy. This downturn is set to continue for some time – with residential sales and new residential construction falling sharply.
• The value of both imports and exports was weaker month-on-month in October – with imports falling more significantly, which resulted in China’s trade surplus increasing to US$84.5 billion – the largest monthly total by a sizeable margin. It is worth noting that there has been a steady increase in both import and export prices in recent months – reflecting a range of factors, including rising commodity prices, physical shortages of some inputs (most notably semi-conductors) and disruptions to global shipping (leading to increased freight rates).
• Real retail sales increased by 1.9% yoy (down from 2.6% yoy in September). Real sales remain incredibly weak when compared with pre-COVID-19 trends, remaining a constraint on China’s economy.
• Over the first ten months of 2021, new credit issuance totalled RMB 26.3 trillion – down around 15% yoy. Over this period, there was a marginal increase in bank lending – rising by 1.2% yoy to RMB 17.9 trillion – while non-bank lending has fallen substantially. This is largely the result of large scale declines in bond issuance by China’s corporate sector (down 39.0% yoy) and governments (down 30.3% yoy).
• The PBoC has continued to hold the Loan Prime Rate (its main policy rate) steady at 3.85%, having last cut rates in April 2020. Global markets are expecting policy rates for major advanced economies to rise earlier than previously anticipated (albeit still some time away), and this may limit the capacity of the PBoC to provide any additional monetary boost to the economy.

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