China’s economic recovery not nearly as weak as feared in October, but support needed to avoid ‘backsliding’

Retail sales and industrial output exceeded expectations in October, but investments disappointed and the property sector remained a weak link
Officials conceded ‘the foundation of the economic recovery still needs to be consolidated’, with policies set to remain supportive to aid the recovery

China's economic recovery

Luna Sunin Beijing

Published: 10:01am, 15 Nov 2023

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China’s mixed economic data in October pointed to an uneven and precarious recovery, with the world’s second-largest economy still in need of more supportive policies in the face of persistent headwinds.

Consumption and industrial activities exceeded market expectations last month, but investments disappointed again and the property sector remained a weak link.

Thanks to a spending spree during the extended “golden week” holiday, retail sales rose by 7.6 per cent in October, year on year, beating market expectations and rising from 5.5 per cent growth in September, the National Bureau of Statistics (NBS) said on Wednesday.

But real estate investment fell by 9.3 per cent in the first 10 months compared with a year earlier, contracting further from the 9.1 per cent drop in the first three quarters, adding to the risk the property sector poses to China’s outlook.

Policy looks set to remain supportive, and possibly even stepped up to prevent the economy from backsliding

Capital Economic

“The data suggests that the recovery was struggling to gain a strong footing at the start of the fourth quarter, but it was not nearly as weak as some had feared,” said analysts at Capital Economics.

“Nonetheless, we still expect a modest reacceleration in growth over the coming months. Policy looks set to remain supportive, and possibly even stepped up to prevent the economy from backsliding.”

Dragged down by a property downturn, fixed-asset investment expanded by 2.9 per cent in the first 10 months, year on year, falling from the 3.1 growth per cent in the first nine months.

Private investment, meanwhile, remained in contraction in the first 10 months as confidence remained feeble.

“There are still many external instabilities and uncertainties, and domestic demand remains insufficient,” the NBS said on Wednesday.

“The foundation of the economic recovery still needs to be consolidated.”

Additional public investment on water infrastructure, affordable housing and urban renovation are likely to become sources of headline growth, said Xu Tianchen, an economist with The Economist Intelligence Unit.

In October, China’s industrial output remained stable as growth edged up to 4.6 per cent compared to a year earlier from 4.5 per cent in September, with the production of automobile, solar batteries and integrated circuits registering notable increases.

But October’s disappointing purchasing managers’ index data pointed to persistently weak domestic demand, and analysts expect the government to further stimulate the market.

Zhou Hao, chief economist at Guotai Junan International in Hong Kong, said the central bank has already increased liquidity support and more credit support for the ailing property market is expected.

Before the release of the data on Wednesday, the central bank injected 500 billion yuan (US$68.7 billion) of net liquidity into the market via the medium-term lending facility.

The move suggested that monetary policy will remain supportive to aid the economic recovery, he added.

Elsewhere, the overall surveyed urban jobless rate stood at 5 per cent in October, unchanged from September.

“Given persistent growth headwinds from the property downturn, still-fragile confidence and lingering financial risks, we expect the central government to step up easing materially in the coming months,” Goldman Sachs said on Wednesday.

China’s economic recovery has become a global concern, with its performance in sharp contrast with upbeat growth in neighbouring countries, after its 4.9 per cent growth in the third quarter, year on year, was largely thanks to the low base of comparison.

India’s economy grew by 4.4 per cent in the third quarter from a year earlier, and has enjoyed a wave of activity due to the Diwali festival.

Vietnam’s gross domestic product growth also accelerated in the third quarter, with the 5.33 per cent expansion compared to a year earlier largely driven by robust manufacturing activity and exports.

In the third quarter, China’s economy surprised the market and rose by 1.3 per cent from the previous three months, higher than the sequential rise of 0.8 per cent in the second quarter. China’s economy grew by a cumulative 5.2 per cent in the first nine months of the year.

And the third quarter growth also meant China is expected to need year-on-year growth of only 4.4 per cent in the fourth quarter to achieve the “around 5 per cent” full-year growth target.

Ding Shuang, chief Greater China economist at Standard Chartered Bank, said China’s economy may grow by 5.7 per cent in the fourth quarter, bringing full-year growth to 5.4 per cent.

He added that real estate and infrastructure investment would not be the focus of any long-term stimulus, with hi-tech consumption as well as services potential highlights.

Additional reporting by Mia Nulimaimaiti and Ji Siqi