Commentary Directory

China's Weak Start to Q3 Means More PBoC Easing

Jacob Hess
August 15, 2023

The month of July saw China's industrial production remaining relatively stagnant, with a marginal 0.01% MoM growth and a YoY increase of 3.7%. This figure represented a slight dip from the 4.4% YoY growth observed in the preceding month of June. While manufacturing production maintained a moderate upward trajectory, registering a 3.9% YoY growth, the high-tech manufacturing segment showed a relatively modest growth rate of only 0.7% YoY. A major downtrend in the semiconductor and computer industries continues to impact the latter segment of production.

From China National Bureau of Statistics: Industrial Production, Fixed Asset Investment, and Retail Sales

In the metals industry, China displayed signs of rebound, with ferrous metal smelting and non-ferrous smelting witnessing robust YoY growth rates of 15.6% and 8.9% respectively. These encouraging figures suggest pockets of resilience within the metals sector, even as the broader global economy slows. However, these areas of production are coming off of low bases which could be inflating the numbers a bit. The electrical machinery manufacturing sector remained strong, with a substantial YoY growth of 10.6%; however, the electronics equipment manufacturing segment, including semiconductor production, struggled, with a meager 0.7% YoY growth. Again, the latter low rate of growth is being impacted by weak semiconductor demand. The strength in metals production was also evident in the output of crude steel and steel. Both recorded YoY growth rates exceeding 10%.

Once again, we also see China’s investment in renewable manufacturing emerging as a noteworthy source of growth within the industrial landscape. "New energy vehicles" output surged by an impressive 24.9% YoY, while solar cells output and power generation equipment also recorded remarkable YoY growth rates of 65.1% and 15.7% respectively. However, the semiconductor sector faced significant headwinds, with semiconductor output witnessing a staggering -22.3% YoY decline.

Amidst mixed production data, China's national fixed asset investment demonstrated only a modest YoY growth of 3.4% in the year-to-date period through July. This figure represents a decrease from the 3.8% YoY growth observed in June. Of note is the negative YoY growth of -0.5% in private investment, reflective of liquidity challenges within China's financial system. Contrasting with this private sector trend, state-owned businesses maintained robust investment growth at 7.6% YoY. This growth can be attributed to the Chinese government's continued support for the economy through fiscal and monetary measures. The real estate sector's struggle was evident in its investment figures, with a significant YoY decline of -8.5% in the year-to-date period through July. This decline marked the weakest performance since September of the previous year, highlighting the continued challenges faced by the real estate market. In response to these challenging investment trends, the People's Bank of China (PBoC) took an unexpected step to ease the situation, cutting its medium-term lending facility rate by 15 basis points to 2.50%.

Finally, we turn to an update on the Chinese consumer. Retail sales growth experienced a minor setback in July. MoM growth dropped to -0.06%, and YoY growth dipped from 3.1% to 2.5% compared to June. The 2.5% YoY growth disappointed the consensus forecast of 4.4% YoY by a large margin. While food and beverage revenue continued to exhibit strength, growing at an impressive 15.8% YoY, certain sectors faced significant challenges. Jewelry sales plummeted by -10.0% YoY, office supplies witnessed a decline of -13.1% YoY, and building materials sales contracted by -11.2% YoY. Even sales in daily necessities experienced a decrease of 1.0% YoY. Weakness in these areas suggests that the post-pandemic-fueled rebound is basically over, and Chinese households are returning to more normal patterns of spending.

In general, the Chinese economy entered Q3 2023 with little hope that the underwhelming first half of the year can be reversed. While certain areas of manufacturing show some resilience, most grapple with economic headwinds that have been blown by the central banks abroad. The Chinese government's support measures and adaptive policies will play a pivotal role in trying to flip the current trends, but so far, its efforts have been futile.

From Econ Mornings