China’s economy showed surprising resilience in August, with faster-than-expected growth in manufacturing output and retail sales, supporting a fragile recovery, but the worsening property crisis weighed on the outlook .
The better-than-expected figures show the world’s second-largest economy gaining momentum, after narrowly escaping a contraction in the June quarter and slightly raising the outlook for a recovery for the rest of the year.
Industrial production rose 4.2% in August from a year earlier, the fastest pace since March, according to the National Bureau of Statistics (NBS). That beat a 3.8% increase analysts expected in a Reuters poll and July’s 3.8% expansion.
Retail sales rose 5.4% from a year ago, the fastest in six months and also beating expectations for growth of 3.5% and a gain of 2.7% in July.
“This is due to a lower basis for comparison – the Delta wave was weighing on economic activity in August 2021,” said Julian Evans-Pritchard, China economist at Capital Economics.
Although the upbeat data lifts some of the gloom weighing on the slow recovery, which had been clouded by weak trade data and sluggish credit growth, Evans-Pritchard does not expect strength continues in September.
“And while the current virus wave may have peaked, activity is expected to remain weak over the coming months amid the worsening housing downturn, slowing exports and recurring disruptions to the global economy. COVID-19,” he said.
The auto industry has been a major driver of both factory output and retail sales, with production of new energy vehicles jumping 117%, helped by government incentives for cleaner cars.
However, outages at several state oil refiners and independent plants and thinning margins kept crude throughput near two-year lows. Daily coal production also slipped to its lowest level in three months.
REAL ESTATE CRISIS
With few signs that China will significantly ease zero-COVID soon, some analysts expect the economy to grow just 3% this year, which would be the slowest since 1976, excluding the 2.2% expansion during the first hit of COVID in 2020.
“Since the beginning of this year, the situation facing economic development has become more complex and more serious than in 2020,” NBS spokesperson Fu Linghui said, citing the risk of a global slowdown and challenges. related to COVID controls in China. However, he said recent political support was having some effect.
Contrary to the good activity data, the real estate sector contracted further in August, as house prices, investment and sales extended the losses.
Property investment fell 13.8% last month, the fastest pace since December 2021, according to Reuters calculations based on official data.
New home prices fell 1.3% year-on-year in August, the fastest since August 2015, extending a 0.9% decline in July.
Once a key driver of economic growth, China’s property market has gone from crisis to crisis since mid-2020 after regulators stepped in to reduce excessive developer debt.
Housing woes have weighed on the world’s second-largest economy, with policymakers now scrambling to head off a prolonged downturn.
In an environment of low consumer and business confidence, companies are reluctant to expand and hire more workers. The national survey-based unemployment rate fell slightly to 5.3% in August from 5.4% in July. Youth unemployment remained high at 18.7%, after hitting a record high of 19.9% in July.
Policymakers have announced more than 50 economic support measures since late May and have highlighted this quarter as a critical time for policy action.
However, rapid declines in the yuan against the US dollar are complicating the case for looser monetary support, worrying policymakers.
The yuan weakened past the psychologically important level of 7 to the dollar for the first time in two years on Friday, under pressure from a buoyant dollar and high market expectations for an even more aggressive rate hike. American interest next week.
Bruce Pang, chief economist at Jones Lang Lasalle (NYSE:JLL), does not expect China’s central bank to cut short-term interest rates.
The easing could instead come through liquidity measures and support for manufacturing and green investments.
“Other policy options, including a reduction in the reserve requirement ratio, remain on the table,” Pang said.
Others expect a decline in the benchmark prime lending rate, after China’s big banks lowered deposit rates, which could ease pressure on margins.
To spur growth, the authorities have dusted off an old playbook by issuing debt to fund major public works projects. Infrastructure investment rose 8.3% in the first eight months from a year earlier, compared with 7.4% in January-July, data showed on Friday.
A cabinet meeting chaired by Premier Li Keqiang on Tuesday announced extended tax relief for small businesses and an additional 200 billion yuan lending quota for manufacturing industries and social services.
Analysts expect more disruption from tighter COVID controls in September ahead of the ruling Communist Party Congress that begins Oct. 16, where President Xi Jinping is set to break with precedent and get a third term as director.
A new economic leadership team, which would likely be strengthened next year, will inherit a series of challenges, including questions about how to untie what many see as an unsustainable zero-COVID policy, the housing crisis and the tensions with Washington.