China’s economy at a glance: September 2017

China’s old economy surprises on the downside, may point to weaker Q3 growth.

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Overview:

  • We have previously flagged the potential for slowing economic growth in the second half of 2017 – following the surprisingly strong results in the first half of the year. Two months of weaker fixed asset investment – particularly this month’s result – and industrial production (China’s old economy) could signal softer GDP growth this quarter. Our economic forecasts remain unchanged – we anticipate growth of 6.7% in 2017 (unchanged from 2016), before easing to 6.5% in 2018 and 6.25% in 2019.
  • Fixed asset investment stood out for its weakness this month. Nominal investment rose by 4.9% yoy (compared with 6.8% in July), however the upturn in producer prices suggests that the growth in real investment was negative – at around -2.4% yoy – the largest real decline recorded since late 1995. In nominal terms, manufacturing investment was particularly weak, while real estate investment was relatively stable (albeit at weaker rates than the first half of 2017). Despite some softer trends for housing starts and house prices, it is too early to say there has been a broad slowdown in construction activity – particularly given the strength in Chinese steel production (a key input to the sector).
  • Growth in China’s industrial production slowed a little further in August – with output up by 6.0% yoy (from 6.4% previously). Crude steel continues to surge – with production rising by 8.7% yoy to 74.6 million tonnes – the third straight month of record output. In contrast, cement – another construction related sector – saw output fall by 3.7% yoy.
  • China’s trade surplus narrowed in August – down to US$42.0 billion (compared with US$46.7 billion in July) – driven by a sizeable month-on-month increase in imports. Much of the growth in import values has been driven by commodity price trends, with volumes rising more modestly. Export data remains impacted by historical distortions in China-Hong Kong data, which understates current growth.
  • Nominal retail sales growth was a little softer in August, which combined with a slightly stronger rate of inflation, has pushed down the growth in real retail sales to 8.9% yoy (from 9.6% in July). The slowing trend for real retail sales across the past two months came despite consumer confidence rising further in July – up to 114.6 points – the highest level in over two decades.
  • The relative stability in China’s monetary policy has continued in recent months, with the 7 day Shibor trading in a narrow range of 12.5 basis points since the start of August. That said, the Shibor has softened in September, down to around 2.8% at the time of writing. The PBoC is pursuing ‘prudent and neutral’ monetary policy in 2017 – aiming to maintain stable liquidity and ‘hold interest rates at an appropriate level’. Managing the sizeable corporate debt burden and the risk of capital flight should US interest rates rise further (as expected) means we maintain an upside bias to rate expectations over the next twelve months.

For further details, please see the attached document: