China’s activity data in October were mostly weak, consistent with our theme of an anemic recovery that stabilizes at low levels. These dynamics are also consistent with what we heard in meetings last week in Beijing, with sentiment towards the economy only marginally improved since our last visit in July. Growth is not terrible and the worst is over cyclically (for now) but the recovery is struggling to broaden and to gain momentum, particularly when it comes to private sector demand and the property sector.
The year-over-year growth rates in October for activity series such as retail sales and industrial production look decent but that largely reflects base effects: in October of last year, Chinese cities were in rolling lockdowns as the zero-Covid policy was pushed to the breaking point. If one looks at two-year growth rates or month-over-month sequential growth, these series show little improvement or even a slight deceleration from September.
The lack of momentum increases pressure for Beijing to maintain support for the economy. The leadership will soon turn to key economic meetings in December that lay out the agenda for 2024: the end-year Politburo meeting and the annual Central Economic Work Conference. While policy has become more supportive in recent months, the leadership is still focused on incremental measures that aim to maintain fiscal and financial discipline. This strategy has been largely ineffective in shaking up fragile expectations and reviving confidence. The authorities will be inclined to show a response to ongoing weakness, particularly on property, increasing the odds of an RRR cut in the near term. However, we don’t expect a shift from incremental support to anything approaching the bazooka.
The lack of improvement in property data should be a particular concern for the authorities, coming after a slew of easing measures since the 24 July Politburo meeting. Beijing will need to worry about the potential for a double dip in the economy if property worsens and may consider more aggressive actions to boost confidence. A major test is whether the authorities roll out stronger measures to support developers’ access to finance, which Beijing has been reticent to do given concerns over moral hazard, the optics of bailing out private companies that Xi Jinping regards as bad actors, and the expense. Given those policy tensions, risks to property are on the downside. And property, in turn, remains the key risk for broader growth.
Retail Sales:
- Nominal retail sales were up 7.6% y/y from 5.5% y/y in September, but the two-year annualized growth rate slowed from 4% in September to 3.5% in October. Sequential growth was weak at 0.07% in October, roughly even with 0.04% growth in September.
- Interlocutors in China last week emphasized that consumer sentiment remains weak and households are acting frugally. The data bear this out, with little improvement in household spending on big ticket items such as durables.
- While the surveyed urban unemployment rate stayed even at 5%, other indicators and our discussions in China point to a fairly weak jobs recovery, which is restraining household income growth and spending.
Fixed asset investment and property:
- Property data were weak despite a steady drip of easing measures. Housing sales by area were down -20.3% y/y in October, from -19.8% in September. New housing starts were down -21.2% y/y from -15.2% y/y in September. Real estate fixed asset investment fell to -9.3% in Jan-Oct, from -9.1% in Jan-Sept. Developer financing improved only slightly, down -17.0% y/y from -18.8% in September.
- Dragged down by property, overall fixed asset investment (FAI) missed forecasts and slowed to 2.9% in Jan-Oct from 3.1% in Jan-Sept. Infrastructure FAI (5.9% y/y Jan-Oct) and manufacturing FAI (6.2% y/y Jan-Oct) both head roughly steady. Infrastructure investment will get support in coming months from a recent surge in bond issuance by local governments, though a considerable portion of these proceeds are going to repay debt rather than fund new projects.
Production:
- Industrial production picked up to 4.6% y/y from 4.5% in September but slowed on a two-year basis (4.8% in October from 5.4% in September). On a sequential basis, IP grew 0.39% in October, a marginal improvement from 0.36% in September.
- Services production accelerated to 21.3% y/y from 17.1% in September, reflecting the base effect from last October’s lockdowns. On a two-year basis, services production slowed to 3.8% from 4.1% in September.
Taiwan election gets interesting – with potentially big implications for geopolitical risks
On Wednesday, Taiwan’s main opposition parties – the Kuomintang (KMT) and Taiwan People’s Party (TPP) – announced they will field a joint ticket for presidential and legislative elections on Jan. 13. There are still key issues to be worked out: the coalition will decide on Saturday which party’s candidate will lead the ticket for president. That decision could be fractious for the candidates and their voters. For example, supporters of TPP candidate Ko Wen-je, a maverick who formed the TPP as a breakaway party, may balk at supporting the establishment KMT. In short, it isn’t clear if the coalition will hold together or be effective at the voting booth.
Still, the development injects new competition into a presidential race dominated by DPP candidate, and current vice president, William Lai. Beijing is unnerved at the prospect of an election by Lai, a strong supporter of Taiwan’s political autonomy from China. The KMT and TPP favor engagement with Beijing though Ko’s specific position is vague. If the opposition coalition pulls off a victory, it is likely to mean a substantial reduction in China-Taiwan tensions – at least temporarily – as Beijing will see reason to deepen dialogue and try carrots over sticks in its Taiwan policies. That could have considerable knock-on effects for the perceived political risks for Taiwan assets (such as TSMC) and to a lesser extent mainland equities as well.
While the dynamics of this election remain fluid, investors may wish to at least keep an eye on developments. We will be monitoring closely.
