China Activity & Spending (Oct.)

Consumption and services back to normal

  • The latest data suggest that the broad-based acceleration of China’s economy continued in October. Policy stimulus continued to boost investment and industrial output while growth in real retail sales and services activity returned to pre-virus levels.
  • Growth in industrial value-added held steady at 6.9% y/y (the Bloomberg consensus was +6.7%, our forecast was +6.9%) despite one fewer working day in October than last year. And growth on our Industrial Output Index, which is based on the output volumes of key goods, strengthened from 5.8% y/y to 8.7%. (See Chart 1.) Production of construction materials and electronics components was especially strong. Factories continue to benefit from strong foreign demand for Chinese goods. Growth in industrial export sales accelerated to is fastest since the US-China trade war kicked off in earnest in mid-2018. (See Chart 2.)
  • Fixed asset investment expanded 1.8% y/y year-to-date (Bloomberg and CE +1.6%), implying that capital spending improved from 7.6% y/y in September to 9.3% last month. (See Chart 3.) The main driver of this was infrastructure investment growth which jumped from 4.6% y/y to 7.5%, most likely due to a rush among local government to spend the remaining proceeds from the rapid issuance of government bonds earlier in the year. This would explain the recent shift in the composition of investment spending from private firms toward state firms. (See Chart 4.) Growth in capital spending by manufacturing firms also strengthened from 3.0% y/y to 3.5%, presumably reflecting increasing optimism in response to the rapid economic turnaround and resilience of exports.
  • Property investment growth edged up, from 11.9% y/y to 12.2%. But this mostly reflects spending on existing projects and we continue to think this strength is unsustainable. Admittedly, sales did rebound strongly in October, rising 15.4 % y/y, the fastest pace in over three years. But this likely reflects unusually deep discounts launched by major developers in a bid to shore up cashflows, rather than a pick-up in underlying demand. Growth in new starts did edge up last month but remains tepid, likely reflecting increased caution among developers in the face of stricter rules on their borrowing. (See Chart 5.)
  • Meanwhile, the rebound in consumption continued to strengthen. Retail sales improved from +3.3% y/y to 4.3% (Bloomberg and CE +5.0%). This is despite retail price inflation turning negative last month, mostly due to lower oil and pork prices. In real terms, retail sales growth is now back to its pre-COVID trend. (See Chart 6.) This helped to nudge up services output growth, from +5.4% y/y to 7.4%, an 18-month high. (See Chart 7.) Meanwhile, the surveyed unemployment rate edged down from 5.4% to 5.3%, only 0.1%-pts higher than at the end of last year. (See Chart 8.)
  • The upshot is that the negative shock to the labour market and service sector from COVID-19 now appears to have fully reversed. Consumption still has room to strengthen further in the near-term given the excess household savings that built up earlier in the year. Meanwhile, supportive fiscal policy should keep activity in industry and construction strong until at least the start of next year. And although fresh lockdowns abroad pose downside risks to exports, we think demand for the type of goods that China produces should prove relatively resilient in such circumstances. All told, we expect a period of above-trend economic growth in the coming quarters.

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: Retail Sales (% y/y)

Chart 7: Services Activity (real, % y/y)

Chart 8: Surveyed Unemployment Rate (%)

Sources: CEIC, WIND, Capital Economics

Julian Evans-Pritchard, Senior China Economist,
Sheana Yue, Assistant Economist,

Julian Evans-Pritchard Senior China Economist
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