November data out of China add to the stronger picture painted by recent activity releases. However, it will be hard to turn market confidence without addressing the twin headwinds – or double dragon – of household confidence and the health of the housing market.
Robust end to the year
China posted a strong set of monthly activity data for November, giving more evidence that the economy has found a firmer footing. Industrial production beat consensus expectations by a wide margin, expanding 6.6% year over year – up from 4.6% in October and 0.9 ppts above consensus. And, while retail sales fell short of lofty expectations, they still rose to 10.1%. Arguably, consensus was far too bullish on retail sales: high frequency moves in these key indicators are more than solid.
We estimate that retail sales expanded 6.6% month over month annualized, which takes the three-month growth rate to 9.1%. Similarly, the service sector production index rose 7% on the month. The NBS reported that industrial production was up 11% month-over-month annualized, helped by another decent showing from autos and the previously reported exports. Putting it all together, our China Activity Indicator (CAI) backs up the conclusion that momentum has picked up from the summer trough (Chart 1).
Chart 1. Our China Activity Indicator implies the economy has gotten over its summertime blues
Source: Haver, Refinitiv, abrdn, December 2023.
A big question remains over the state of real estate and what this means for the growth outlook heading into 2024.
The pipeline of new builds continues to point to a stabilization, implying we could be getting closer to the nadir for property as a whole. But other metrics – which had looked like they were showing a tentative stabilization last month – now appear more like a continued slide (Chart 2). This implies that the real estate adjustment is probably still weighing on the economy via investment and other channels. Overall, the drag from property still likely has some way to go.
Chart 2. New starts are stabilizing, but other metrics now show a continued fall
Source: Haver, abrdn, December 2023.
More questions are being raised about the state of underlying demand, given a notable acceleration of price declines. The proportion of cities reporting price rises in existing buildings dropped to zero in November (Chart 3). And after adjusting for seasonal norms, prices fell at a faster pace in Tier 1 cities. In November, Beijing, Shanghai, and Shenzhen reported prices declined by around 1% month over month (non-annualized).
Chart 3. Property price declines are accelerating
Source: Haver, abrdn, December 2023.
Policy has at least reacted, but it remains far from clear that the cumulative impact of all the small support measures enacted will be enough.
Downpayment ratios and terms have now been cut in both Shanghai and Beijing. That said, as long as households are happy to sit on the sidelines – perhaps hoping for further price falls – their substantial bank deposits may continue to sit in time accounts (Chart 4). Negative headline inflation (-0.5% year over year) could potentially convince some that returns from their savings accounts are acceptable.
Chart 4. Savings provide a route to housing stabilization and an upside surprise
Source: Haver, abrdn, December 2023.
Policymakers are not feeling the heat
China's Central Economic Work Conference (CEWC) concluded last week with little indication of a major change in policy direction. Better macro data is likely tempering any desire to accelerate stimulus, but the authorities are also likely to want to see how previous actions play out. Strong government bond issuance over the last four months will continue to filter through to activity as we head into 2024. Indeed, our estimate of the credit impulse has turned back up sharply, returning to positive territory (Chart 5).
Chart 5. Strong government debt issuance is helping boost credit flows
Source: Bloomberg, Haver, abrdn, December 2023.
Moreover, we estimate that the authorities have managed to push policy into a modestly accommodative position overall (Chart 6).
Chart 6. Financial conditions show policy has gained moderate traction, but risks being insufficient
Source: Bloomberg, Haver, abrdn, December 2023.
The China Financial Conditions Index (CFCI) was little changed on the month, but another larger-than-expected liquidity injection via the medium-term lending facility in December implies the PBOC is still loosening at the margin and is cognizant of the need to help markets digest debt issuance.
Further fiscal easing also seems plausible. And the CEWC struck a somewhat more nuanced tone on government debt. Reading the tea leaves on these announcements is not easy, but the authorities seem to be recognizing the need for central government assistance and a coordinated approach to ensure stability while addressing debt risks.
Local governments with strong balance sheets may be asked to do more to help mitigate the economic drag caused by consolidation among those provinces in difficulty. The authorities also flagged the need to put in place a more robust fiscal framework for the long run. We will need to wait to see what proposals for fiscal reform are drawn up.
Final thoughts
Whether growth really has moved up the priority list, or conversely, whether addressing government debt is set to become the next phase of de-risking, is a key distinction. We lean towards the former but recognize the risk of the latter.
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