October 3, 2023

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China’s economy is showing some signs of stabilization but a real estate decline threatens the outlook

China’s economy is showing some signs of stabilization but a real estate decline threatens the outlook
  • China’s industrial production and consumption indicators show improvement
  • Real estate investment is declining, and private investment is shrinking
  • The real estate sector remains a major obstacle to economic recovery
  • Analysts expect more political support to maintain growth momentum

BEIJING (Reuters) – China’s factory output and retail sales grew at a faster pace in August, but a decline in investment in the crisis-hit real estate sector threatens to undermine a wave of support steps that show signs of stabilizing parts of the volatile sector. Economy.

Chinese policymakers face an uphill task in trying to revive growth after a brief post-Covid-19 rebound in the wake of persistent weakness in the vital real estate industry, a faltering currency and weak global demand for manufactured goods.

Data published by the National Bureau of Statistics on Friday showed that industrial production rose 4.5 percent in August compared to a year ago, accelerating from the pace of 3.7 percent in July and exceeding expectations for a 3.9 percent increase in a Reuters poll of analysts’ opinions. The growth represents the fastest pace since April.

Retail sales, a measure of consumption, also rose at a faster pace of 4.6% in August supported by the summer travel season, and was the fastest growth since May. This compares to a 2.5% increase in July, and an expected rise of 3%.

The upbeat data indicates that a wave of recent measures to support the faltering economy is beginning to bear fruit.

However, analysts say a lasting recovery is by no means guaranteed, especially as confidence remains low in the beleaguered real estate sector and remains a major impediment to growth.

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“Despite signs of stabilization in manufacturing and related investments, deteriorating real estate investment will continue to put pressure on economic growth,” said Gary Ng, Natixis’ chief economist for Asia Pacific.

However, markets showed relief with some indicators that were better than expected.

The Chinese yuan touched a two-week high against the dollar, while the CSI 300 Index (.CSI300) rose 0.2% and Hong Kong’s Hang Seng Index (.HSI) rose 1% in early morning trading.

Further boosting sentiment, separate commodity data showed that China’s primary aluminum production hit a record monthly high in August while oil refinery output also rose to a record high.

Reuters graphics

More policy support is needed

Friday’s data came on the heels of better-than-expected bank lending numbers, narrowing the scope of declines in exports and imports as well as easing deflationary pressure.

Passenger vehicle sales in the country also returned to growth in August compared to the previous year, as rebates and larger tax breaks for electric vehicles boosted consumer sentiment.

In order to maintain the recovery momentum, China’s central bank said on Thursday that it will reduce the amount of cash banks must hold in reserves for the second time this year to boost liquidity. Earlier in the day, the bank also renewed outstanding medium-term policy loans to inject more liquidity into the financial system.

But analysts say more fiscal and monetary policy steps are needed, as a struggling real estate sector, rising youth unemployment, uncertainty over household consumption, and growing Sino-US tensions over trade, technology and geopolitics have raised the bar for a durable future economic recovery. near. .

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“Yesterday’s reduction in the Reserve Requirement Ratio (RRR) sent an interesting signal that there is a sense of urgency to boost growth,” said Qiu Zhang, chief economist at Pinpoint Asset Management, anticipating more policies over the coming months to boost aggregate demand.

Confidence remains the root cause of most problems that require greater “constructive policy and regulatory changes” to boost growth momentum, Natixis’ Ng said.

Real estate recession

The once-robust real estate sector remains a drag on the $18 trillion economy, with Country Garden, the country’s largest private developer, the latest to falter due to lack of cash.

The new industry figures provided little comfort to policymakers and investors. In August, real estate investment continued to decline, down 19.1% year-on-year from a 17.8% decline the previous month, according to Reuters calculations based on National Bureau of Statistics data.

“We are still hopeful that housing sales will see successive small increases in the coming months, but the stimulus will ultimately fall short of reviving the sector,” said Louise Lu, a China economist at Oxford Economics.

Other data released on Friday also showed weak investor confidence, with private investment contracting 0.7% in the first eight months, deepening from the 0.5% contraction in the January-July period.

Investment in fixed assets expanded at a slightly slower pace of 3.2% in the first eight months of 2023 compared to the same period of the previous year, compared to expectations for a 3.3% increase. It grew by 3.4% in the first seven months.

The uncertain business climate means companies remain cautious about hiring, but the nationwide survey-based unemployment rate improved slightly to 5.2% in August versus 5.3% in July.

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“Beijing may have to take more aggressive real estate easing measures to achieve a real recovery,” analysts at Nomura Bank said, echoing a view agreed upon among Chinese observers.

“Beijing will likely once again be forced to play the role of borrower and spender of last resort.”

($1 = 7.2765 Chinese yuan)

(Reporting by Liangping Zhao, Albie Zhang and Kevin Yao) Editing by Shri Navaratnam

Our standards: Thomson Reuters Trust Principles.

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Joe Cash reports on economic affairs in China, covering domestic fiscal and monetary policy, key economic indicators, trade relations, and China’s growing engagement with developing countries. Before joining Reuters, he worked on UK and EU trade policy in the Asia-Pacific region. Joe studied Chinese at Oxford University and speaks Mandarin.