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China Economic Activity August 2023

China: Economy shows signs of recovery in August

Industrial output grew 4.5% in year-on-year terms in August, which was above July’s 3.7% increase. The upturn was largely due to pickups in manufacturing and mining and quarrying output.

Meanwhile, nominal fixed investment rose 3.2% in January–August, which was below January–July’s 3.4% expansion and marked the worst result since December 2020. A sharper contraction in primary-sector investment and softer growth in tertiary-sector investment drove the slowdown. The dichotomy between the public and private sectors remained: While state investment was up over 7% through August, private investment fell in the same period.

Retail sales growth rose from 2.5% in July to 4.6% in August, buoyed by improved sales of clothing, furniture, cosmetics and cars, among other subsectors.

The data for both industrial output and retail sales was above market expectations in August. Together with a downtick in the urban unemployment rate, smaller contractions in exports and imports and the end of consumer price deflation in the month, this suggests a nascent stabilization of economic activity amid a host of recent stimulus measures by the government and Central Bank. That said, the weak property sector continues to drag on the economy.

ANZ’s Raymond Yeung said:

“The upside surprises on both the data and policy fronts have prompted us to revise our GDP forecast upward. […] However, our view remains that China will continue to experience a structural economic downturn. The improvement in GDP figures over the next few quarters does not represent a turnaround in fundamental challenges, such as worsening demographics, lack of productivity improvement and trade tensions. The economy will continue to operate with slack capacity (ie negative output gap).”

Nomura analysts struck a similar tone:

“Some may be of the view that China’s economy has already bottomed out, but we remain cautious for the following reasons. First, the rise in retail sales might be mainly driven by higher energy prices and the release of pent-up summer travel demand, which has now started to weaken again. Second, IP growth may still face headwinds due to the contraction of exports and property investment (at -10.9% y-o-y in August, up only slightly from -12.2% in July). We believe that the recent raft of supportive measures in the property sector may not be enough to turn things around, and Beijing still needs to ramp up policy support to deliver a more sustainable recovery.”

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