• Consumption Trends – August retail sales data indicates a weakening in consumption growth momentum across the board. In addition to COVID mobility restrictions, sluggish household income growth and slowing new home sales are weighing on household spending growth. A tightening in new vehicle supply has led to a contraction in car sales.

• Trade Trends – Early backlogging for the holiday season as well as continuing production disruptions in southeast Asia underpinned China’s strong export growth in August. We continue to anticipate a slowdown in exports as competing exporters come back online. Regarding the RMB exchange rate, looming QE tapering in the US will exert downward pressures on emerging market currencies, including the RMB. RMB depreciation may coincide with a decline in China’s exports, which would weaken demand for RMB.

Implications for Business

Given COVID disturbances in August, subdued macroeconomic data is no surprise.  However, it is increasing regulatory tightening and raw material prices, in addition to COVID, that is dragging on industrial production, heretofore the major driver of China’s current economic recovery. In particular, pressing 2021 targets to reduce energy consumption and to contain carbon emissions, together with coal shortages due to trade and COVID disruptions to coal supply, have led to massive power cuts and production suspensions in the industrial sector. A tight supply of coal, coal power production, and the impact on upstream metal products, are impacting the manufacturing sector. In parallel, strict financing restrictions aimed at real estate development have not only drastically slowed new home sales in the past two months, but also raised significant liquidity risks for the largest property developers, most prominently, Evergrande. 

The big question then is, given the increasing growth and inflation pressures, will we see regulatory easing in the coming months? China’s new “cross-cyclical” approach implies that policy adjustments will be taken only in small and targeted steps with a view of smoothing out volatility but basically permitting what is seen as a natural downshift in potential growth. As a reference, a PBoC working paper from March 2021 estimates China’s potential growth during the 14th FYP at 5 to 5.7 percent per year. This said, we expect policy to ease in some areas (e.g. production controls) but remain strictly in place for others (e.g. developer financing). Members shouldn’t have high hopes for stimulus and should expect increasing volatility in the near-term.