November’s activity data released today shows China’s sharp slowdown is continuing.
Since the summer, consumption has been hit by strict lockdowns to contain fresh virus cases. Industrial production has been hurt by power cuts. Property investment has been curbed by regulatory restraints on developers, and infrastructure investment has been limited by slow local government borrowing.
Today’s data again showed weakness in consumption. Retail sales slipped from 4.9%YoY to 3.9%YoY last month as the chart shows. Similarly, fixed asset investment fell from 6.1%YoY to 5.2%YoY year-to-date as property and infrastructure investment continued to decline. In contrast, industrial production picked up from 3.5%YoY to 3.8%YoY as semiconductor shortages and power cuts diminished.
November’s firmer industrial production shows activity will respond if economic conditions ease.
To help China’s slowdown bottom out now, we expect the authorities will undertake further steps over the next few months to support growth.
First, the People’s Bank of China (PBoC) is likely to cut banks’ reserve requirement ratios (RRRs) again after this month’s broad 50bps reduction to boost liquidity in the financial sector.
Second, local governments are set to speed up borrowing in 2022 to fund new infrastructure.
Source: Bank of Singapore, Bloomberg.
Strikingly, both this month’s Politburo meeting and the Central Economic Work Conference were dovish, seeking to ‘keep growth within a reasonable range’ and aiming to ‘accelerate fiscal expenditures and front-load infrastructure investment at an appropriate pace.’
We expect local governments will respond by borrowing at a faster rate to finance new projects in 2022. This will be in clear contrast to 2021 as local government borrowing has been much tighter this year. For example, the pace of total social financing - a measure of broad credit growth - has fallen from 13.6%YoY in November 2020 to 10.1%YoY this November.
Thus, looser monetary and fiscal policy should help China’s slowdown bottom out over the next few months. We forecast China’s GDP growth will ease from a high 7.9% in 2021 to its underlying long-term trend rate of 5.5% in 2022.
The big wildcard for next year’s outlook remains China’s zero-cases strategy to the virus. President Xi is seeking a third five-year term at the next Party Congress in November 2022. If officials fail to reopen China to the outside world and continue to impose strict lockdowns before the event, then growth may slow more sharply than we currently anticipate. But if the authorities were to abandon their stringent approach sooner rather in the year, then economic activity would likely exceed expectations in 2022 to the benefit of China’s financial markets.
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