Daily Management Review

China's Economy Appears To Be Improving, But Property Market Collapse Threatens Outlook


China's Economy Appears To Be Improving, But Property Market Collapse Threatens Outlook
August saw stronger increases in manufacturing output and retail sales in China, but falling investment in the crisis-hit real estate sector threatens to undermine a flurry of support measures that are beginning to stabilise certain aspects of the shaky economy.
Given the continued instability in the vital real estate sector, the depreciating value of the yuan, and the lacklustre demand for China's manufactured goods abroad, officials in that country face a difficult task in trying to resuscitate GDP following a brief post-COVID rebound.
According to statistics issued on Friday by the National Bureau of Statistics (NBS), industrial output increased 4.5% in August compared to a year earlier, accelerating from the rate of 3.7% in July and exceeding forecasts for a 3.9% gain in a Reuters poll of analysts.
The expansion occurred at its quickest rate since April.
The summer travel season helped retail sales, a measure of consumption, grow at a quicker 4.6% rate in August, which was the fastest expansion since May. This was in contrast to a 2.5% gain in July and a predicted 3% growth.
The encouraging numbers indicate that a number of recent initiatives to support the economy are beginning to show results, leading JP Morgan to increase its prediction of China's GDP growth in 2023 from 4.8% to 5%.
Additionally, ANZ raised its 5.1% growth prediction for the second-largest economy in the world by 0.2 percentage points.
However, analysts warn that a long-lasting rebound is far from certain, particularly given the low level of confidence in the troubled property industry, which continues to be a significant drag on development.
"Despite signs of stabilisation in manufacturing and related investment, the deteriorating property investment will continue to pressure economic growth," said Gary Ng, Natixis Asia Pacific senior economist.
But when some of the measures came in better than expected, the markets expressed relief.
In early morning trading, the blue-chip CSI 300 Index rose 0.2% and Hong Kong's Hang Seng Index rose 1%, as the Chinese yuan reached two-week highs versus the dollar.
Separate commodity data revealed that China's primary aluminium output reached a record-high monthly level in August and that oil refinery throughput also increased to a record level, further boosting mood.
The data released on Friday came after better-than-anticipated bank lending data, a narrowing of import and export reductions, and a reduction in the deflationary pressure.
In August compared to a year earlier, China's passenger vehicle sales also increased, as deeper discounts and tax benefits for electric vehicles improved customer confidence.
China's central bank announced on Thursday that it will reduce the amount of cash banks must retain as reserves for the second time this year in order to increase liquidity and maintain the recovery's momentum. To add extra liquidity to the financial system earlier in the day, the bank also rolled over maturing medium-term policy loans.
A failing real estate market, high youth unemployment, uncertainty surrounding household consumption, and rising Sino-U.S. tensions over trade, technology, and geopolitics, according to analysts, have raised the bar for a long-lasting economic recovery in the near future.
"The reserve requirement ratio (RRR) cut yesterday sent an interesting signal that there is a sense of urgency to boost growth," said Zhiwei Zhang, chief economist of Pinpoint Asset Management, expecting more policies over the coming months to bolster overall demand.
According to Ng of Natixis, the majority of issues still stem from a lack of trust, necessitating more significant "constructive policy and regulatory changes" to accelerate growth.
The once-dominant real estate market continues to be a drag on the $18 trillion economy, with Country Garden, the largest private developer in the nation, being the most recent to falter due to a liquidity crunch.
The most recent industry statistics didn't provide investors or policymakers any solace. According to calculations by Reuters based on NBS data, property investment continued to decline in August, falling 19.1% year-over-year following a 17.8% decline in July.
According to figures released by the finance ministry on Friday, state land sales revenue declined for the 20th consecutive month in August, which put additional strain on the budget of local governments that are already heavily indebted.
"We are still hopeful that housing sales would stage small sequential pickups in the coming months, but stimulus will ultimately stop short of reflating the sector," said Louise Loo, China Economist at Oxford Economics.
Other information, also made public on Friday, indicated low investor confidence, with private investment falling by 0.7% in the first eight months, a sharper decline than the 0.5% decline seen from January to July.
In contrast to estimates for a 3.3% increase, fixed asset investment increased at a somewhat slower rate of 3.2% in the first eight months of 2023 compared to the same period a year earlier. In the first seven months, it increased 3.4%.
Companies continued to be cautious about hiring due to the uncertain business environment, but the overall survey-based unemployment rate slightly decreased to 5.2% in August from 5.3% in July.
"Beijing may have to introduce more aggressive property easing measures to deliver a real recovery," Nomura analysts said in a note, echoing a consensus view among China observers.
"Beijing will likely once again have to play the role of borrower and spender of last resort."