China’s economic data shows signs of life amid prevailing doom-and-gloom outlook

China’s economic data shows signs of life amid prevailing doom-and-gloom outlook
China faces a difficult path toward economic recovery, but some data suggests that elements of the nation’s economy are improving. (Illustration: SCMP/Henry Wong)
  • Economists say alternative high-frequency data points – from subway ridership to commodity prices – suggest parts of China’s economy are functioning well
  • Economic downturn seen shrinking nation’s middle class, but while some say China may not be in a crisis, its economy is “not out of the woods, yet”

As the hits kept coming, marring China’s battered businesses with fresh bruises over the past month, the discourse surrounding an economic crisis grew louder, and the headlines more prominent.

International banks lowered their annual growth forecasts for the world’s second-largest economy; the yuan’s rate against the US dollar kept falling; Beijing suspended the release of dismal youth unemployment figures; and the country’s largest private property developer, Country Garden, warned that it is on the brink of default.

Mistrust from the public and overseas investors over Beijing’s official narrative is also growing, even as Beijing has repeatedly vowed to crack down on statistical fraud.

But despite the negative sentiment, some economists point to alternative high-frequency data points – from subway ridership to commodity prices – that suggest many parts of China’s economy are functioning well.

However, data on the real estate sector – the single biggest contributor to the country’s economy, as it constitutes about 30 per cent of GDP – still points to no meaningful improvement, despite rounds of stimulus policies from Beijing, they said.

“The bottom line is that China’s economy is not out of the woods, yet. But it’s not in crisis, either,” said Larry Hu, chief China economist at Macquarie.

He said growth remains lacklustre due to the drag from property and weak confidence, while high-frequency data suggests that the economy has stabilised at a low level.

“Contrary to the prevailing narrative of an imminent recession or even implosion, the Chinese economy is showing more signs of stabilisation rather than further deterioration,” Hu said. “Policy actions over the past month have been in line with the pro-growth pivot at the July Politburo meeting, although policymakers need to act more decisively to pull the housing market out of its ongoing downward spiral.”

During the tone-setting meeting, China’s leadership for the first time in years dropped the phrase “houses are for living in, not for speculation”, pointing to a pro-growth shift in the property sector. So far, a slew of relaxing measures – from reducing down payments to scrapping the requirement of “no mortgage records” for identifying “first-home buyers” – have been implemented.

The Nanhua industrial product price index, a measure of domestic commodity prices reflecting the demand for industrial and infrastructure investment, grew by 2.5 per cent in August, after rising 6.6 per cent in July.

(Source: Nanhua Futures, Wind)

“So, the infrastructure investment is probably picking up, and China’s economy – looking from the perspective of commodity demand – is still functioning, it’s more like a soft patch than a hard landing or crash,” Hu said.

According to a sentiment index compiled by French investment bank Natixis via posts on Chinese social media and news reports, economic uncertainty has gradually eased since June, when the rapid depreciation of the yuan and stock market fluctuations took a heavy toll on confidence.

As for investment sentiment, while remaining low this year, it has still improved compared with earlier this year. Consumer sentiment, meanwhile, has improved steadily and moderately since the start of 2023, with similar trends seen in industries such as food, automotive and fashion, Natixis data showed.

One of the biggest spotlights has been luxury goods sales. As the world’s second-largest luxury market, China has made a solid comeback since the start of the year, after a blip in 2022 due to stringent zero-COVID lockdowns.

According to data from Sandalwood, a global alternative data platform, China’s domestic offline luxury consumption in July increased by 46 per cent compared with the same time last year – when Shanghai was yet to emerge from a citywide lockdown – and also rose by 17 per cent compared with July 2021.

The main reason for the robust luxury sales in China this year is that the impact of the pandemic on high-income groups is relatively small – a phenomenon also seen in other countries, said Ying Zhang, a research analyst with the Economist Intelligence Unit.

“The impact of the economic downturn may be more obvious in terms of the shrinking middle class,” she said.

Apart from a divergence among different income groups, China’s consumption trend this year is polarised among sectors, as service consumption such as concerts, tourism and catering have been better than the sale of goods – which has been more suppressed by worsening income prospects, Zhang said.

Sandalwood data showed that the total booking value on two major Chinese travel platforms, and Tongcheng Travel, hit a record high in July, thanks to the high demand during the summer holiday.

Despite the slightly weakening momentum in August, it still maintained double-digit growth: in the first half of August, bookings on increased by 85 per cent by value, year on year, and on Tongcheng Travel they increased by 60 per cent.

In some major cities, the subway passenger volume has also been well above pre-pandemic levels in the past few months, though that of the top three metropolises of Beijing, Shanghai and Guangzhou have yet to fully recover to 2019’s level, according to data compiled by Wind, a Chinese financial data provider.

The summer box office data also reached a new historical high this year. According to movie industry data provider Dengta, the box office in China from June to August reached 20.62 billion yuan (US$2.83 billion), compared with the previous record of 17.78 billion yuan achieved in 2019.

But such high-frequency data is highly impacted by incidental factors, such as the timing of festivals, said Lu Ting, chief China economist at Nomura.

“For the box office, it is highly related to the movies that are on show, so we tend to not jump to any conclusion on the economy just based on the box office,” he said, adding that movie ticket prices are also higher than before the pandemic.

And the surge in subway ridership is also related to the growing infrastructure construction in the past years – with new metro lines appearing in Chinese cities, Lu added.

Dan Wang, chief economist at Hang Seng Bank China, said the surge in consumer spending in tourism and entertainment – which are heavily driven by a pent-up need to get out and de-stress after COVID-19 lockdowns – is unlikely to be sustainable.

“With low shares and low growth, those segments were never pillars of China’s economy, despite being highly visible,” she said. “Ultimately, those non-essential consumptions are constrained by household income, which is determined by overall economic growth.”

For China’s economy, she added: “If you are looking at any place other than housing, you are wasting your time.”

Economists from Capital Economics, measuring growth by tracking China’s industrial output, construction activity, traffic volume, property and car sales and electricity consumption, said the economy regained some ground in July, following a contraction in June.

“But the big picture is that output has levelled off recently and that the economy could tip into a downward spiral unless policy support is ramped up soon,” they said in a note in late August.

“Troubles in the property sector will weigh on confidence among homebuyers and firms for some time. And the risks to exports remain skewed to the downside. The government has responded with some policy support. But it remains too timid and slow-moving.”

High-frequency data on the property sector, such as the volume of new home sales in major cities, has remained weak and shown little improvement, despite Beijing’s relaxing measures, economists said.

China’s current weak labour market and high youth unemployment suggest cyclical problems, and that the economy is running below potential growth

The deepest property downturn in history certainly reflects changes in long-term fundamentals, to a certain degree, but it was also driven by earlier policy tightening and was aggravated by the pandemic and lockdowns, according to Wang Tao, head of China Economic Research at UBS.

“Notwithstanding demographic challenges in the long term, China’s current weak labour market and high youth unemployment suggest cyclical problems, and that the economy is running below potential growth,” she said in a note last week.

Wang Tao added that one of the causes of the weaker-than-expected stimulus policies from Beijing is a delayed comprehension of the weakness in China’s economy, mainly due to the uneven recovery reflected in data from different sectors – from the strong domestic travel rebound to the worsening property market – since the second quarter.

“What could trigger a larger and more comprehensive policy response from here,” she mulled. “While we do not think the high youth unemployment is an imminent threat to social stability, the worsening of economic data – including on property construction, industrial production, retail sales and exports – could mean more challenges in the overall labour market, in corporate health, and in local government operations.

“As such, we expect weak data leading to more policy actions in the coming month.”

This article was first published on SCMP.

Source: South China Morning Post/fh