External headwinds are strong and Domestic woes are looming. Although the Zero-COVID policy was somewhat relaxed, there is yet to be a clear timeline for ending it altogether. The rebound of the asset market is conditional on policy support. The 4Q GDP will likely slow to 3.2% YoY from 3.9% in 3Q and conclude the year at 3.0%. For the time being, we maintain our GDP forecast at 4% for 2023.

Retail sales

Retail sales growth retreated further from +2.5% YoY in September to -0.5% in October amid repeated lockdowns across major cities. On a monthly basis, it contracted 0.68%. The number of domestic tourists during week-long National Day holidays dipped for the 3rd year in a row by 18.1%. Growth of big-ticket items such as automobiles fell from 14.2% to 3.9%. Jewelry contracted by 2.7% over a year earlier. Even daily used goods also declined by 2.2%.  Note that necessity is lesser affected by consumption sentiment. For the first time, E-commerce giants stopped reporting “Single-Day” online sales performance.

Elevated unemployed rate and negative wealth effect from the asset market drive rising precautionary savings. Household deposits jumped by 14.5% as of September. This, in turn, restrains the propensity to consume (see Wary household shun debt, crimp consumption). Reflecting sagging consumption sentiment, CPI fell from 2.8% YoY in September to 2.1% in October. In particular, the Core CPI, which excluded food and energy, stayed modest below 1% for 4 months. Services price inflation grew mildly at 0.4% YoY in October, down from 0.5% in the previous month. Hopefully, large-scale lockdown could ease after announcing the latest adjustment of the Zero-COVID policy. Yet, partial relaxation boosts outbound instead of inbound tourism. This will partly offset the recovery momentum. 

Industrial production

Factory activities growth moderated from 6.3% in September to 5.0% in October due to inter-provincial supply chain disruption. Textile output fell by 4.2%. Production of semi-conductors plunged by double-digit under the prevailing context of intensifying US-China tension over the semiconductor space.  These offset the 8.6% advancement of automobiles and 84.6% of EVs. Mirroring the tepid production capacity, PPI fell by 1.3% YoY.  This is the first contraction since 2020 despite elevating global energy prices.

Overseas orders are drifting down. PMI of major trading partners such as the US and EU are retreating, with exports to these economies falling by 9.0% YoY and 12.6% in October respectively.  As a result, freight rates for goods transported from China to North America and Europe contracted sharply in tandem with Baltic Dry Index. Meanwhile, ASEAN countries’ demand, which accounts for 15.6% of China’s exports, also started easing from around 30% YoY in 2Q-3Q to 20.3% in October. China’s total exports thereby contracted by 0.3% YoY in October, compared to double-digit growth in the first 9 months. Outward shipments from the Guangdong province, which accounts for over 26% of China’s exports, also stayed flat for the first 9 months. A strong CNY relative to other currencies undermines competitiveness of Chinese goods. Year-to-date, CNY depreciated by 11.2% against USD. This was relatively mild comparing to JPY at 22.0%.

Fixed asset investment

On a brighter note, advancement of fixed asset investment edged down from 5.9% YoY YTD in September to 5.8% in October. This was largely driven by the double-digit growth from the public sector. Infrastructure investment inched slightly upward from 8.6% in September to 8.7% in October. Higher steel output and lower rebar inventories pointed to further infrastructure investment.

More projects on renewables, such as solar and wind power plant, will commence under the prevailing policy goal of reducing carbon emissions. Water conservancy is also one of the targets in response to heat waves and droughts. Reportedly, China’s Ministry of Water Resources invested CNY703.6bn during the first eight months. This represented an increase of 63.9% over the same period in 2021. The government also spared no effort in upgrading data infrastructure. The NDRC expects investment in big data centres to grow at an annual rate of more than 20%, with a cumulative investment of more than CNY3tn. To fund these projects, local government special bond issuance jumped by 49.7% YoY YTD in September. The PBoC also injected funds into policy banks via the Pledged Supplemental Lending (PSL) program for two consecutive months after halting it for 30 months.

Real estate investment sagged further by 8.8% YoY YTD in October from 8.0% last month due to the adverse liquidity condition of the property sector. Sources of funding for developers fell by 24.7% YoY in October. Overall land purchases plunged by 53% YoY YTD. The government has issued a 16-point plan to salvage the mired housing market. Developer borrowings due within the next six months are now extended for a year. The authority also urged financial institutions to offer fair treatment towards SOEs and POEs, enabling credit lines to quality developers with manageable default risks. Meanwhile, the authority asked joint-stock commercial banks to provide >Rmb400bn of new financing to the property market in Nov-Dec (on top of Rmb600bn financing provided by 6 SOE banks). CBIRC, MOHURD and PBoC jointly issued a notice to support the reasonable utilization of proceeds held under developers’ presales escrow accounts with a Letter of Guarantee provided by an eligible commercial bank. These targeted measures could serve as a relief for quality developers.

Yet, default risks of developers with weaker financials stayed elevated. The market-based approach restructuring is reinforced. The rebound of property bond prices is relatively weaker than equity prices, which indicates the policy effect primarily felt on improving market sentiment rather than short-term liquidity. Demand from homebuyers will remain sluggish. The housing price has already declined by 13 consecutive months. Pre-sales performance of major developers plunged by 33.7% YoY YTD.  A sustainable rebound would require fundamental reversals in economic conditions.

Monetary policy

On the monetary front, PBoC keeps the 1-Y MLF unchanged at 2.75%. Ongoing FED tightening prevents PBOC from cutting rates aggressively as downward pressure on CNY would mount. Improving new mid & long-term corporate loans also downplayed the urgency of rate cuts, as the downtrend was already reversed since the last cut in August. It advanced by 6.6% YoY YTD in Oct. Although this is much lower than the board money supply growth of 11.8%, the gap has been narrowing, which reflects a gradual improvement in credit demand.  

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