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People walk along a pedestrian street surrounded by small shops in the city of Changsha, in China’s Hunan province, on September 7. Retail sales have bounced back in China. Photo: AFP
Opinion
Aidan Yao
Aidan Yao

Coronavirus recovery: what China’s blockbuster August economic data reveals

  • Economic growth has accelerated faster than expected, with all major activity indicators beating market projections, and the recovery has become more broad-based
  • This should result in fine-tuning of monetary policy stimulus, with fiscal policy now expected to do the heavy lifting
China’s blockbuster August data shows that the country’s economic recovery has gained further strength after its V-shaped rebound in the second quarter.
All major activity indicators beat market expectations, with industrial output growing 5.6 per cent year on year, and a 0.8 percentage point rise from July, bouncing back to its pre-crisis level much faster than anticipated. Also impressive was the fact retail sales registered their first year-on-year gain, 0.5 per cent, in 2020, rebounding 1.6 percentage points from July.
With other engines – infrastructure investment and exports – continuing to propel the economy, the revival of private-sector growth – consumption and manufacturing investment – has made the recovery more balanced and self-sustaining. Beijing is likely to see this as reassuring, leading it to further fine-tune monetary policy to avoid overstimulation, while relying on fiscal measures to shepherd growth back to previous trajectories.
Delving deeper into the latest data, the supply side of the economy has continued to lead the normalisation process. Industrial output growth speeded up in August as the impact of floods in southern China faded. Mining output resumed expansion, rising 1.6 per cent, thanks to Beijing’s infrastructure push and buoyant residential construction, which also bolstered growth in machinery production (up 15 per cent).
Output of electronics and telecommunication equipment continued to benefit from work-from-home arrangements and an acceleration of the 5G roll-out within China. Finally, a strong rebound in energy production showed that the overall recovery has gained further steam.
On the demand side, while exports have been a constant source of upside surprises, the highlight of the August data is consumer spending. Retail sales grew for the first time in 2020, making it the last sector to exit a protracted recession.
The data revealed broad-based recoveries across different categories. For instance, clothing and garment sales posted their first year-on-year gain as shopping malls reopened and people felt more comfortable resuming activities in public places.

Nationwide, more than 80 per cent of cinemas had opened by the end of August, while the increase in the number of people eating out has narrowed the growth decline in restaurant and catering sales.

Discretionary spending on cars (up 11.8 per cent), mobile phones (25.1 per cent), cosmetics (19 per cent) and home appliances (4.3 per cent) also grew strongly, thanks in part to a further decline in the surveyed unemployment rate to 5.6 per cent.

Elsewhere, the investment engine has continued to power ahead, fuelled by strong credit and fiscal easing. The better-than-expected total social financing data for August was driven in large part by a 1.38 trillion renminbi (US$200 billion) increase in government bond issuance, which should provide solid financial backing for infrastructure investment going forward.

Manufacturing investment staged an impressive rebound, suggesting that some companies have finally regained the confidence to go ahead with capital expenditure.

However, the recovery remains fickle and nascent, and requires continuous nurturing in the form of credit/tax support and policy clarity on Beijing’s latest initiatives, such as the “dual circulation” strategy, to ensure that the momentum is not lost prematurely.
Finally, property investment growth picked up further last month, with residential sales growth surging to its highest level since 2017. However, the latter, coupled with strong home price appreciation, has provoked some local authorities to tighten purchasing rules and the debt ratios of property developers, to curb overheating risks in some markets.

Beijing will continue to manage the housing market with differentiated policies – curtailing excesses in some areas, while maintaining support for others. A wholesale tightening of housing market policies is unlikely in the near term before the economy fully regains strength.

A woman points at the model of a residential compound by China Vanke at a showroom in Dongguan, Guangdong province, on October 2, 2018. Photo: Reuters

Overall, the August data delivers two encouraging messages: economic growth has accelerated at a faster pace, and the recovery has become more broad-based. The consumer spending catch-up is particularly reassuring; getting the largest economic engine back online is critical to ensuring a balanced and self-sustained recovery.

Beijing is likely to take this as validation for returning to a more neutral monetary policy, while watching closely for the emergence of financial imbalances. The time for additional aggregate easing, such as reserve requirement ratio and interest rate cuts, has passed, particularly as fiscal policy is expected to do further heavy lifting.
China’s gross domestic product growth is on track to reach 5 per cent in the third quarter and 6 per cent in fourth, with full-year growth at 2.3 per cent – an outstanding performance in a year where the International Monetary Fund expects the global economy to contract by close to 5 per cent.

If the growth momentum continues in China, the main risk for the market before the year ends is a growing disparity between China and the rest of the world.

Aidan Yao is senior emerging Asia economist at AXA Investment Managers

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