China’s economy showed signs of recovery in August as Beijing introduced stimulus measures to counter a slowdown, although a property market slump and Covid outbreaks continue to influence the outlook.
Industrial production, retail sales and fixed-asset investment all grew faster than economists expected last month. The urban jobless rate slid to 5.3 per cent, while the youth unemployment rate fell from a record high.
The boost to retail sales was partly the result of a lower base of comparison from a year earlier and a surge in car sales after Beijing gave buyers subsidies on electric vehicles. Industrial output was also supported by a rise in electricity production during August’s heatwave, a rebound that is unlikely to be sustained.
Despite signs of improvement, the recovery remains fragile as Covid outbreaks spread to more parts of the country and the government tightens curbs to contain infections in the run-up to the Communist Party’s twice-in-a-decade leadership congress next month. A property market slump also shows no sign of easing, with separate data on Friday showing home prices have now declined every month in the past year, with the contraction in August bigger than in July.
“While today’s data are better than expected, it’s unlikely to change the prevailing pessimism towards China, given the multiple headwinds underway including zero-Covid, property rout and the lack of decisive policy moves before the Party Congress,” said Larry Hu, chief China economist at Macquarie Group.
Investors were unmoved by the data, with the yuan’s breaching of the key level of seven to the US dollar on Thursday weighing on sentiment. The CSI 300 Index of stocks fell 1.6 per cent as of 9.43am UAE time, with the weekly loss of 3.2 per cent in line for the worst performance in two months. The yuan weakened 0.2 per cent to 7.0257 per dollar in the offshore market, while the yield on 10-year government bonds rose two basis points to 2.68 per cent.
The data showed “the economy withstood the impacts of multiple unexpected factors and sustained the momentum of recovery”, even as it faces a more complex and grim situation this year than in 2020, given the difficulty in controlling Covid outbreaks and a slowdown in the global economy, said Fu Linghui, a spokesman for the National Bureau of Statistics in Beijing.
Helen Qiao, chief economist for Greater China at BofA Global Research, said the data suggest annual growth may still be able to reach 3.5 per cent this year, although domestic demand is weak.
“We need to see more policy action to help,” she said. “In our view, the only policy that will help is to relax the Covid controls.”
The government and central bank took several steps recently to support the housing and construction industries, seeking to bolster an economy that has slowed sharply this year. Government spending on infrastructure has also been increased and the central bank has cut interest rates to spur growth.
The People’s Bank of China refrained from another interest rate cut this week as the currency comes under pressure. The offshore yuan weakened past the key seven-to-the-dollar level for the first time in more than two years on Thursday.
Bloomberg economists Chang Shu and Eric Zhu said the upside surprise in China’s August headline activity data buried bad news.
"The month-on-month changes in industrial output and retail sales pointed to weaker momentum in the recovery. This suggests even stronger stimulus failed to counter impact from power shortages, Covid lockdowns and the property slump," they said.
"We expect policy makers to strengthen support — increasing leeway for local governments to issue more special bonds and cutting interest rates further by year end."
Economists have been downgrading their growth forecasts steadily this year to 3.5 per cent, which would be the second-weakest annual reading in more than four decades and is well below the official target of "about 5.5 per cent" announced in March.
“Looking ahead, we believe the policy support to the economy will continue,” said Zhou Hao, chief economist at Guotai Junan International Holdings. He expects the loan prime rates to be lowered further “as the mortgage loans remain soft”.
The automotive industry was a key driver for August’s pick-up in industrial output and retail sales after the government halved the tax on some new passenger cars from June 1, fuelling demand. The production of new energy vehicles soared 117 per cent year on year last month.
Power generation was another main contributor with coal-based production of electricity jumping 14.8 per cent last month from a year earlier to address shortages, mainly in the country’s south-west that was hit by a heatwave and a drought.
Output of construction-related materials continued to fall, reflecting protracted weakness in the real-estate sector. The production of cement fell 13.1 per cent year on year in August, deepening from a drop of 7 per cent in the previous month.
Aluminium output, however, hit a record last month despite power shortages, up almost 10 per cent after exports rose in recent months to to make up for production losses caused by the rise in energy costs in the wake of Russia’s invasion of Ukraine.
Beijing’s Covid Zero strategy is a major threat to growth, with key cities like Chengdu only recently emerging from lockdowns. Tourism has been decimated and travel during the upcoming National Day holidays in October is being discouraged.