August’s activity data was worse than expected as China’s soft patch continues during Q3’21.
Source: Bank of Singapore, Bloomberg.
The first chart shows retail sales only expanded by 2.5%YoY compared to 8.5%YoY in July as consumption, notably car sales and catering, was hit by outbreaks of the delta variant and strict lockdowns to return to zero virus cases.
Fixed asset investment also fell from 10.3%YoY in July to 8.9%YoY in August. Restrictions on lending for property and infrastructure investment continue to curb overall investment.
Last, industrial production eased from 6.4%YoY to 5.3%YoY in August as manufacturing output was hurt by shortages including for semiconductors.
Source: Bank of Singapore, Bloomberg.
The weakness of August’s retail sales, fixed asset investment and industrial production shows activity remains subdued in Q3’21. But China’s economy is still unlikely to stall after its V-shaped recovery from the pandemic.
First, local governments are set to step up borrowing to finance new spending. The second chart shows total social financing - a measure of broad credit growth - has fallen from over 13%YoY at the end of 2020 to 10.3%YoY in August. Mortgage loan growth continues to decline as the People’s Bank of China (PBoC) keeps restricting lending for property investment. But local government borrowing picked up last month and is set to accelerate as local authorities still have nearly half their annual quotas to utilize for issuing bonds to fund projects.
Second, the PBoC is likely to follow up its July cut in commercial banks’ reserve requirement ratios (RRRs) with further moves to free up liquidity to support lending if economic activity continues to be subdued for the rest of 2021.
Third, foreign demand for China’s goods and services remains robust. August’s exports were stronger than expected, increasing by 25.6%YoY as the rest of the world continues to reopen.
Thus, we keep our GDP forecasts of firm growth of 8.2% for 2021. But we will continue to monitor near-term, downside risks to China’s economic outlook for the rest of the year.Disclaimer applicable to recommendation
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