China financial support to Russia

China’s economy is stabilising

  • In line with EIU’s projections, data released on September 15th by China’s National Statistics Bureau (NBS) suggest that the economy has bottomed out. 
  • Year-on-year growth accelerated in August for retail sales (4.6%, from 2.5% in July) and industrial value-added (IVA; 4.5%, from 3.7%), although fixed-asset investment (FAI) in January-August (3.2%) slowed marginally from January-July (3.4%).
  • The readings were in line with our expectations, and we retain our forecast of 5.2% real GDP growth for 2023. That said, building signs of structural stress in the economy have dampened our longer-term outlook, and we now expect headline growth to trend consistently below 5% over the remainder of the 2020s. 

Service consumption remains the pillar of China’s consumer recovery. August was the first month for which the NBS released data on retail sales of services (which expanded by 19.4% year on year); this new indicator encapsulates consumer spending in sectors such as education and tourism. The strength of these dynamics was also reflected in price indices tied to the service industry, which helped to stabilise (still-sedate) headline consumer price inflation readings at 0.1%, in August. Another month-on-month increase in consumer prices—at 0.3%, accelerating marginally from 0.2% in July—underpins our belief that consumer confidence is recovering, to the benefit of consumer-facing industries. We expect this underlying strength to persist through the remainder of 2023.

SALES FIGURES FOR CONSUMER GOODS AND SERVICES INDICATE THAT SPENDING ON SERVICES CONTINUES TO PUMP UP HEADLINE INFLATION

Sales of discretionary goods achieved strong improvement in August. Year-on-year growth was stable in categories such as cosmetics (9.7%), communication devices (8.5%) and gold and jewellery (7.2%), suggesting a return of some expenditure towards durable goods and away from services (which, thus far, have dominated the consumer rebound narrative). As the summer holidays end and (domestic) tourism demand fades, we expect this “redirection” of spending to pick up pace.

Nevertheless, the degree of this transition should not be overstated, and we retain (and highlight) our overarching view that spending on services remains the main driver of China’s broader recovery in consumption. Upcoming holidays—including the mid-Autumn festival in late September and the “Golden Week” national holiday on October 1st‑7th—are likely to put tourism volume on an upward trajectory. The moribund employment situation and lingering price sensitivity among consumers will probably continue to constrain some tourism expenditure, however.

STRONG DISCRETIONARY GOODS SALES ACROSS A NUMBER OF CATEGORIES SUGGEST THAT CONSUMER CONFIDENCE IS BUILDING IN CHINA

The spectre of deflation will remain just that

China’s weak inflationary environment, which we expect to persist in the coming months, is emblematic of the shaky outlook for the country’s consumer expenditure. However, our forecasts do not assume that China will fall into deflation. Instead, we assume that the economy has already bottomed out; these factors will help to underpin growth in China’s core inflation (excluding fuel and food prices), even as overall price pressures generally remain muted. 

The one exception remains pork prices, which jumped by 11.4% month on month in August and continue to serve as one of the main drivers of headline inflation. Expected hoarding of supply by farmers, who anticipate higher prices in the coming months (in response to seasonal demand trends), will probably cause pork prices to trend higher until the end of the year. However, data on swine stocks indicate that pork supply remains abundant, which should contain overall prices (particularly amid government scrutiny of food prices). Alongside expectations of negative year-on-year growth in petroleum prices, we expect these factors to keep non-core inflation low.

A COMPARISON OF PORK CYCLE DYNAMICS AND INFLATIONARY TRENDS INDICATES THAT A GLUT IN PORK SUPPLY WILL CAP CHINA'S HEADLINE RATE OF INFLATION

Factories coming back on stream

The IVA growth picture suggests that pressure is easing on China’s large industrial enterprises. The contraction in producer prices (-3% year on year, from -4.4% in July) is easing, indicating the return of factory-related demand. Importantly, growth in electronics production improved considerably in August (to 5.8%, from 0.7% in July), affirming our forecast that the electronics trade cycle would bottom out by the fourth quarter of 2023 (electronics IVA had grown by 5.5% in August 2022, suggesting both the absence of favourable base effects and genuine strength in output). Growth in value added from the automotive industry (9.9%) also accelerated from July, partially reflecting the global expansion of Chinese electric vehicle brands, although a potential EU‑China trade dispute overshadows the outlook for this industry.

Nonetheless, we believe that China’s trade picture has bottomed out, and that improving external demand will support IVA growth until the end of 2023. Domestic demand, tied to destocking cycles in construction materials and other industrial activities, should also help to support both industrial IVA and producer price growth until the end of the year. High-frequency data, including the operating rate of blast furnaces, indicate that some of this momentum has already extended well into the first two weeks of September. 

Property woes are here to stay

The most pessimistic element of China’s economic outlook continues to be the property sector. We expect China’s property market to remain under strain in the near term, with the situation for both home sales and property investment having deteriorated further in August. The government has launched a support package to bolster housing demand, including through lower down payments and looser mortgage rules, but we expect these measures to be limited to China’s large cities and to make only a marginal improvement in the overall housing market outlook.

Nonetheless, these factors may still help to fuel stronger retail sales of decoration materials and household appliances in the coming months (although this will be a lagged timeline, dependent on stabilisation in the housing market). Any boost to retail sales via wealth effects will be limited, however, given long-term structural factors ranging from China’s policy direction, which will continue to discourage speculative practices, to unfavourable demographics, which will weigh on demand (particularly in smaller cities). 

The lukewarm economic outlook, alongside recent credit data, suggests more generally that private investment will continue to struggle in the near term. Private-sector FAI contracted by 0.7% year on year in January-August. Although strong contemporary infrastructure investment, which rose by 6.2% over that same eight-month period, has kept the overall FAI number steady, the difference in these dynamics illustrates the uneven trajectory of China’s economic recovery, and the limited benefits that the current economic situation has offered to (primarily non-state owned) firms. The sustained downturn in investment—including in both the property and private sectors—underpins our revised forecast for 2024; we now expect headline real GDP growth of 4.8% (from 5.1% previously), as a result of our more pessimistic outlook for broader FAI. 

The analysis and forecasts featured in this piece can be found in EIU’s Country Analysis service. This integrated solution provides unmatched global insights covering the political and economic outlook for nearly 200 countries, enabling organisations to identify prospective opportunities and potential risks.