China’s economy continued to accelerate across all fronts in November. We expect output to remain above-trend in the coming quarters, even as tailwinds from stimulus and exports start to ease.
Activity goes from strength to strength
- China’s economy continued to accelerate across all fronts in November. We expect output to remain above-trend in the coming quarters, even as tailwinds from stimulus and exports start to ease.
- Industrial production accelerated last month expanding 7.0%, up from 6.9% y/y in October (Bloomberg median +7.0%, our forecast +7.1%). This implies that growth rose from 0.8% to 1.0% in m/m seasonally adjusted terms. The headline official data are not always a reliable guide to trends in industry. But the recent strength is also apparent on our own measure, the CE Industrial Output Index, which is based on the output volumes of key goods and pointed to growth of 7.5% y/y last month. (See Chart 1.)
- One prop was stronger foreign demand. Factories continue to benefit from the COVID-19 led shift in spending patterns in developed markets away from services and towards consumer goods. Growth in industrial export sales picked up to a two-year high in November. (See Chart 2.)
- Policy stimulus remained a tailwind too. Fixed asset investment expanded 2.6% y/y year-to-date (Bloomberg +2.6%, CE +2.7%), implying that capital spending improved from 9.3% y/y in October to 9.7% last month, the highest level since April 2016. The main driver of this was a sharp acceleration in manufacturing investment. (See Chart 3.) This likely reflects still loose credit conditions and increasing business optimism in response to the rapid economic turnaround and resilience of exports. After an uptick in October, growth in infrastructure investment resumed its downward trend last month, suggesting that fiscal support may be waning. The pace of investment by private firms picked up but they remain more cautious than their state-owned counterparts. (See Chart 4.)
- Property investment growth edged down but remains elevated. This mostly reflects spending on existing projects and we continue to think this strength is unsustainable amid subdued demand. Indeed, growth in sales declined to 12.3% y/y in November. Growth in new starts edged up but remains tepid, likely reflecting increased caution among developers in the face of stricter rules on their borrowing. (See Chart 5.)
- The strong rebound in investment and exports has continued to support jobs growth – the surveyed unemployment rate edged down from 5.3% to 5.2% last month and is now back to pre-virus levels. (See Chart 6.) This is underpinning a recovery in retail sales growth, which improved from +4.3% y/y to 5.0% (Bloomberg and CE +5.0%). In real terms, sales growth had already returned to pre-virus levels at the start of Q4. (See Chart 7.)
- Broader services growth also picked up, from +7.4% y/y to 8.0%, a 27-month high. The monthly data are now consistent with the services component of GDP expanding at pre-virus rates this quarter. (See Chart 8.) Given that industry and construction had already reached this milestone in Q3 and remain strong, this suggests that official GDP growth is likely to return above 6% in Q4.
- Further ahead, foreign demand for Chinese goods will drop back as vaccines start to reverse the recent shift in global consumption patterns. And domestic policy support will be partially withdrawn next year. Nonetheless, we think activity will remain strong in the near-term as households run down the excess savings they accumulated this year. Favourable base effects will also help keep growth rates elevated until at least the middle of next year.
Chart 1: Industrial Production (real, % y/y)
Chart 2: Exports & Industrial Export Sales ($, % y/y)
Chart 3: Fixed Investment (% y/y, nominal)
Chart 4: Fixed Investment (% y/y, nominal)
Chart 5: Real Estate Activity (% y/y)
Chart 6: Surveyed Unemployment Rate (%)
Chart 7: Retail Sales (% y/y)
Chart 8: Services Activity (real, % y/y)
Sources: CEIC, WIND, Capital Economics