However the trade war goes, China’s mixed growth numbers suggest authorities will continue intervening in its economy

Industrial production and infrastructure investment slipped, the trade war outlook is murky and consumer spending mixed
Therefore, look for Beijing to continue policy easing and to boost bonds for infrastructure spending early in 2020

Aidan Yao

Published: 3:00am, 21 Nov 2019

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China’s October activity data, released last week, showed that economic growth was moderate after the uptick in September, repeating a peculiar seasonality that end-quarter strength tends to give way to renewed weakness as the new quarter begins.

Industrial production relinquished most of its rebound from the previous month, with year-on-year growth sliding to 4.7 per cent from 5.8 per cent.

A score goes to the National Bureau of Statistics purchasing manager’s index (PMI), which correctly picked the direction of industrial production moves, given the survey’s focus on medium and large industrial enterprises.

In contrast, the gain in the Caixin PMI, which focuses more on private-sector exporters, has coincided with improved trade growth in October.

The upcoming signing (or not) of a US-China trade deal will be the key to determine the policy trajectory for the first half of next year

Hence, the divergence of the two PMIs – underscored by the sampling differences – seems to corroborate well with other activity data.

Focusing on the drivers of growth, there appears to be a broad-based, albeit small, improvement in external demand in October.

Export growth contracted at the slower pace of 0.9 per cent, consistent with better export orders received by manufacturers.

Shipments to the US led the improvement, possibly due to the suspension of October tariffs and rising optimism of an interim trade deal.

The recovery in the global tech cycle, which supported semiconductor exports to Taiwan lately, might have also helped.

However, the outlook of the trade picture remains murky. While a phase-one deal between the US and China, if struck, could help to restore confidence by halting further tariff hikes, the bar for rolling back the existing levies is much higher.

Without the latter, the export sector may disappoint the market with merely stabilised performance in the coming months.

Looking internally, domestic demand seems to be responsible for most of the renewed weakness in growth momentum.

A broad-based weakened output growth was seen in the industrial sector, while some sectors, such as food processing, even recorded an outright contraction.

China needs to arrest slowing growth, and has the means to do so

One thing worth mentioning – to temper the pessimism – is that while incremental growth in October has clearly slowed from the seasonality-inflated September level, it has still outperformed August’s, suggesting that industrial activity has not deteriorated much beyond seasonal influences.

That said, Beijing cannot afford to be complacent. With the producer price index still mired in deflation and the PMI below the waterline, we think more policy easing is needed to revive growth in the secondary industry.

So far, this effort has achieved mixed success. Manufacturing investment seems to have bottomed out, thanks to earlier tax/fee reductions, which offset the ongoing confidence shock from the trade war.

However, infrastructure investment growth faltered again in October, as local governments used up their bond-issuing quota.

Since Beijing has not yet announced a front-loading of next year’s issuance, there could be a financing vacuum for investment in the near term, calling for a quick resolution to prevent a double-dip in infrastructure investment.

Finally, consumer spending also slowed down in October, with the level of growth dipping below August’s level.

While the direction is consistent with other data, the degree of growth deceleration could have been exacerbated by households delaying their purchases to the Singles’ Day sales in November, during which Alibaba recorded a 25.7 per cent year-on-year increase in online sales this year.

How much would China, and the world, grow if the trade war ends?

Given that e-commerce now accounts for almost 20 per cent of all retail activities, such a deferral of spending could have a material impact on month-on-month data volatility.

Overall, last week’s data was in line with our expectations that one, the September growth rebound overstated the strength of the economy and some paybacks were inevitable; and two, the economy has not bottomed yet, with growth in the fourth quarter likely to fall below 6 per cent.

This, in our view, indicates Beijing will continue policy easing, as monetary conditions have become more restrictive, tightened recently by deepening PPI deflation and renminbi appreciation.

The 5-basis-point medium-term lending facility rate cut showed that the People’s Bank of China can look past rising food prices and maintain a neutral policy stance, which will require a further lowering of nominal rates to keep up with disinflation.

Will China’s steady hand on its economy avert a crash landing?

We expect Beijing to soon announce a front-loading of next year’s bond issuance quota for local authorities to keep the infrastructure investment momentum going.

The scale and speed of policy easing will obviously be data-dependent, but the direction is clear. The upcoming signing (or not) of a US-China trade deal will be the key to determine the policy trajectory for the first half of next year.

Aidan Yao is senior emerging Asia economist at AXA Investment Managers

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