October 2021 China Macro Data Recap

China’s industrial value-added and retail sales growth beat market expectations as the auto sector produced a smaller drag, but property sector indicators continued decelerating sharply, suggesting further weakness in cyclical activity in the next two quarters. Falling commodities imports produced a record monthly trade surplus, while China’s newest onshore COVID outbreak could extend restrictions on travel and services sector activity in the months ahead.

Posted November 15, 2021
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Commodities Whiplash

Based on headline producer price growth of 13.5% in October, it might not seem that commodities prices in China are collapsing. But prices are dropping just as fast as they had risen, driven primarily by supply-related factors, with recent price movements fueled by speculation. There is still little passthrough from rising production costs to consumer prices, given ongoing weakness in consumption and income growth. China’s longer-term price outlook is more likely to be disinflationary, or even deflationary, given a probable decline in investment activity, with demographic pressures also contributing.

Posted November 10, 2021
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Developers Face Risk-Averse Banks

Property developers are under escalating financial pressure—from the “three red lines” limiting debt growth, from declining sales, and from banks. Q3 financial results from listed developers show deteriorating cash positions and the largest quarterly contraction in net financing cash flows since at least 2015. Cash from sales were the weakest since the COVID outbreak, and the lag between sales and reported cash positions indicates there will be a sharper drop in Q4. Conditions are likely worse for smaller, unlisted developers.

Regulators are trying to arrest this trend and keep loans flowing, but this would require banks to put aside the evidence of regulatory controls and weakening fundamentals in the property sector. Beijing could not limit lending to the sector as the property market expanded, nor are they likely to control banks’ risk aversion with the industry in decline.

Posted November 4, 2021
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