BEIJING (Reuters) – Growth in China’s industrial output and retail sales beat expectations in October, but the underlying economic picture highlighted large pockets of weakness as the crisis-hit real estate sector continued to thwart a full recovery.
The world’s second-largest economy is struggling to mount a strong post-Covid-19 recovery, as distress in the housing market, local government debt risks, slowing global growth and geopolitical tensions dampen momentum. A series of policy support measures have proven only modestly helpful, increasing pressure on the authorities to roll out more stimulus.
Data from the National Bureau of Statistics showed on Wednesday that China’s industrial output grew 4.6% in October year-on-year, accelerating from the 4.5% pace recorded in September, exceeding expectations for a 4.4% increase in a Reuters poll. It also represents the strongest growth since April.
Retail sales rose 7.6% in October as auto and restaurant sales growth improved, accelerating from a 5.5% increase in September and marking the fastest pace since May. Analysts had expected retail sales to grow 7.0% due to a lower base effect in 2022 when coronavirus restrictions disrupted consumers and businesses.
Analysts sounded a cautious note on the upside data surprise, noting that the real estate sector remains a weak link of the economy and citing the lack of major reforms as another impediment to a long-term sustainable growth recovery.
“Due to the holiday impact and the low base effect in 2022, the annual figures cannot reflect the actual momentum of the economy,” said Xing Zhaoping, chief China strategist at ANZ Bank.
He said the monthly figures indicate that economic momentum has weakened further as “deflation risks increase”.
Louise Lu, a China economist at Oxford Economics, said a prolonged weakness in external demand could hold back industrial production, although it strengthened last month as inventory depletion pressures eased further.
Consumption also didn’t make much progress during the eight-day Golden Week holiday earlier in October. Trips taken in that period are missing from government estimates as economists say consumers are concerned about their jobs and income growth in an uncertain labor market.
National Bureau of Statistics data showed that the unemployment rate based on the nationwide survey remained at 5.0% in October, unchanged from September. Youth unemployment, which reached a record high of 21.3% in June, was not available after the Census Bureau stopped publishing it since July.
China has intensified its efforts to revive its economy after Covid-19 through a slew of policy support measures in recent months, although the positive effects have been marginal so far.
Wednesday’s upbeat data comes as a host of other October indicators released in recent weeks point to weak growth momentum. Imports registered unexpected growth, but exports contracted at a faster pace, household borrowing remained weak, consumer prices swung lower, and factories continued to contract.
[1/2]FILE PHOTO: Robotic arms assemble cars at a Leapmotor electric vehicle production line at a factory in Jinhua, Zhejiang Province, China, April 26, 2023. China Daily via Reuters/File Photo Obtaining licensing rights
The authorities face a difficult task because any strong monetary support would further widen interest rate differentials between China and the West, especially the United States, and negatively affect the already weak yuan. This could intensify capital outflows, while Beijing is wary of a return to the heavy fiscal stimulus of the past that led to massive debt and crippled the economy.
The economy grew faster than expected in the third quarter, with analysts generally expecting it to reach the government’s full-year growth target of around 5%, although a full recovery is still some time away.
The yuan settled near the highest level in more than two months after a sudden decline in the inflation reading in the United States overnight reinforced bets that the Federal Reserve (the US central bank) had reached the end of its monetary policy tightening cycle.
Real estate, a disappointing investment
China’s central bank, the People’s Bank of China (PBOC), boosted liquidity injections but kept interest rates unchanged when renewing medium-term policy loans due on Wednesday.
In a rare revision last month, the government also raised the 2023 budget deficit to about 3.8% of GDP from 3% to account for the planned issuance of 1 trillion yuan ($137.10 billion) of sovereign bonds.
The People’s Bank of China (PBOC) has cut banks’ reserve requirement ratio (RRR) twice this year to free up liquidity to aid the economic recovery. Analysts widely expect another cut in the reserve requirement ratio and interest rate cuts in the final months of this year.
China’s crisis-hit real estate sector has not yet witnessed a tangible recovery despite strengthening support measures for home buyers, including easing restrictions on home purchases, reducing borrowing costs and other programs.
Real estate investments fell by 9.3% in the January-October period year-on-year, after a similar sharp decline of 9.1% in the January-September period.
Fixed asset investment was disappointing with a 2.9% y/y expansion in the first 10 months, missing expectations for a 3.1% rise. It grew by 3.1% from January to September.
Confidence among private businesses also remained low, with investment in the sector shrinking by 0.5% over the January-October period, slightly less than the 0.6% decline in the first nine months.
“Overall, the data published today suggest that the recovery was struggling to get on a solid footing at the start of the fourth quarter, but was not as weak as some had feared,” said Sheena Yu, China economist at Capital Economics.
“It appears that policy will remain supportive, and perhaps intensify to prevent the economy from falling.”
($1 = 7.2939 Chinese yuan)
(Additional reporting by Albie Zhang and Liangping Zhao) Editing by Shri Navaratnam
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