China: shift of momentum

Exports and consumption extend rebound as investment-led recovery moderates

Summary

  • The recovery in China’s industrial sector, led by a rebound in fixed-asset investment seems to be moderating. 
  • Chinese exports, however, could continue to expand due to improving global demand and China’s advantageous position in terms of controlling the coronavirus.
  • Domestic consumption in China, especially of some hard-hit services, continues to recover. If such trends continue, there could be upside risk to our current GDP forecast for China in 2020.

Investment-led recovery moderates

After a sharp rebound in Q2, the recovery in China’s industrial sector seems to be moderating. The official manufacturing purchasing manager index (PMI) came in at 51.0 in August, a tad softer than the previous month’s 51.1. While the Caixin (Markit) PMI continued to improve in August (to 53.1, up from 52.8 in July), the magnitude of the increase was much smaller than in previous months. 

The first wave of the strong rebound in the Chinese economy since May was mainly driven by the recovery in fixed-asset investment (FAI), led by a resilient property sector and government-sponsored infrastructure investment (China: A more upbeat H2 outlook, 30 July 2020). The recent cooling of momentum in the industrial sector is thus due to the slowdown in FAI growth as the impact of the initial wave of fiscal stimulus on infrastructure spending starts to wane. In July, growth in FAI dipped back into negative territory after having shown positive year-over-year (y-o-y) growth for two consecutive months.

Recent import data from China provide more evidence of the moderation in the recovery in industrial activities. In a previous flash note, we highlighted the surge in China’s demand for some raw materials (China: External sectors recover faster than expected, 15 July 2020). More recent data, however, shows such growth slowing (Chart 1A-1D). For example, in August Chinese imports of iron ore rose by 5.8% y-o-y, down from 23.8% in July and 35.2% in June. The slowdown in iron ore imports likely suggests that the pent-up demand in China for steel has largely been fulfilled and that construction activities are moderating. While there will be more ups and downs ahead, we suspect the most rapid phase of the rebound in FAI (and related demand for raw materials) may be behind us.

China: shirft of momentum

 

Exports continue to expand

China’s exports, however, continued to expand in August.  In USD terms, Chinese exports rose by 9.5% y-o-y in August, up from 7.2% in July and 0.5% in June. Several factors may have contributed to this strong performance.

First, personal protective equipment (PPE) and computers (due to work from home arrangements) remain the main drivers behind the solid export growth. Although off the recent peak of 77.3% reached in May, in August Chinese exports of textile products (including protective suits and facial masks) rose by 47% y-o-y (Chart 2A). Growth in plastic products rose by 90.6% y-o-y in August, the same as in the previous month (Chart 2B). August data on Chinese exports of computers and telecommunication equipment were still not available at the time of writing, but they grew by 19.4% y-o-y in July, up from 3.7% in June. 

China: shift of momentum

Second, as the rest of the world economy gradually recovers from the covid-19 shock, demand for a broader range of products is also rising. For example, Chinese exports of mechanical and electrical products rose by 11.9% y-o-y in August, up from 10.2% in July and 1.6% in June (Chart 3A). Chinese exports of furniture grew by 24% y-o-y in August, further extending the strong rise of 23.1% in the previous month (Chart 3B).

China: shift of momentum

Third, the fact that China is the first major economy heading out of the covid-19 crisis means that from a supply perspective, China is also best equipped to utilise its capacity to meet any potential demand, despite the fact that many Chinese products are subject to 25% US tariffs (e.g., furniture). This could be another reason boosting Chinese exports during the pandemic.

Looking forward, we expect Chinese exports to remain robust as more countries emerge from lockdowns and demand gradually recovers. While a reconfiguration of global supply chains is a likely scenario in the medium term, China remains the backbone of global manufacturing, especially as corporate capex will likely remain muted in most other parts of the world in the foreseeable future.

Momentum maintained in household consumption 

While fixed-investment in China showed some signs of softening in August, household consumption is improving steadily. Nominal retail sales growth was still negative in July (-1.1% y-o-y, up from -1.8% in June), but the growth in passenger car sales accelerated in August, rising 8.9% y-o-y, up from 7.9% the previous month. This points to further improvement in overall retail sales in August as well (Chart 4).

China: shift of momentum

As in many other economies, the recovery of services has lagged behind industry. However, some encouraging signs are emerging. Even for some of the most heavily-hit services, things are improving.

Restaurants and catering services, for example, have staged a sharp rebound after reaching a trough in March. In July, large restaurants and catering services providers reported a y-o-y contraction in receipts of 11.0%, an improvement from -15.2% in June and -18.9% in May (Chart 5A). 

Movie theatres (along with many other entertainment venues) were allowed to re-open in most parts of China in mid-July, and this has led to a quick rebound of box office revenues from virtually zero to levels similar to the 2018-19 average (Chart 5B). 

China: shift of momentum

Online sales of services, including items such as air tickets, travel packages and gaming, returned to positive growth in July (0.2% y-o-y) for the first time since December 2019 (Chart 6A). With people starting to travel again, the transportation sector is gradually moving up from the covid slump. Domestic air traffic is recovering faster than other means of transportation, but was still down by 34% y-o-y in July in terms of total number of passengers. However, the improvement appears firm and steady (Chart 6B).

China: shift of momentum

Services have been playing an increasingly important role in the grand transition of the Chinese economy, and now account for over half of the entire economy (54% of GDP in Q2 2020, to be precise). If the recovery of the services sector maintains its current momentum—which looks possible given the government seems to have the coronavirus quite firmly under control—then our current GDP forecast of 1.8% for China in 2020 could be subject to some upside risk.