China showing signs of recovery, Yuan rallies

Global attention is focused on Chinese economic data and financial market conditions after weakness in the first half of the year, with a troubled property sector, and official action to cautiously lower interest rates and increase domestic bank liquidity. Generally, the flow of economic data was more positive than expected last week with signs of economic momentum gathering –better-than-expected retail sales, stronger loan demand and signs that inflation is rising. The Central Bank is still fine-tuning monetary policy to promote that growth and offset property-sector weakness while trying to avoid a sharp sell-off in the Yuan, and last week showed some signs that this is working.

Markets

• Shanghai Composite Index, 3117.7 market close – unchanged on the week
• Shenzhen Composite Index, 10,144.6 market close – down 1.7% on the week
• Offshore Chinese Yuan, $/CNH 7.28 – Yuan rose 1.1% on the week

Key Events

Stronger Chinese retail sales data

• China’s total retail sales rose 4.6% year-on-year in August, above market expectation of 3%, and up from a rise of 2.5% in July.
• Retail sales excluding autos rose 5.1% year-on-year in August, up from 3% in July.
• Retail sales of goods in all categories were up 3.7%, better than 1.0% in July and 1.7% up in June.

Stronger credit growth in loan data

• China’s newly increased yuan loans in August appeared to be more positive, as the reading jumped to 1.36 trillion yuan ($186 billion), up from 346 billion yuan ($47.4 billion) in July, up 8.8% up year-on-year, beating market expectations.
• The data suggested a speedy credit growth, which was typically a pre-indicator of faster economic growth, however, the devil is always in the details, as breaking down the loans, mid-long term loans to enterprises was 644 billion yuan ($88 billion), 12.36% down year-on-year, and contracting a second month in a row following a slip of 21.6% in July.
• This may suggest that despite the abundant cheap money offered by the banks, enterprises were still wary of long-term investments amid a high level of economic uncertainty.
• Meanwhile, the mid-long term loans to residents, mainly a gauge of new house loans, increased by 160 billion yuan ($22 billion) in August. Although it bounced from a negative growth of 67.2 billion yuan a month earlier, the amount was nearly 40% lower year-on-year.
• This indicates that housing demand across the country was still weak. 

Central Bank boosts liquidity

• China’s Central Bank cut the reserve requirement ratio (RRR) by 25 bp on Friday. This move will release more than 500 billion yuan ($68.7 billion) liquidity into the market to boost economic activities.
• This was the second RRR cut this year, following a move of a 10 bp interest rate cut last month.
• Frequent policy adjustments show that the authorities are moving swiftly to tackle economic challenges, a positive sign, but it could also suggest the fact of a lagging recovery so that more supporting tools are needed to make a meaningful change. 

Consumer inflation revised into positive territory

• The Consumer Price Index (CPI) edged up 0.1% year-on-year in August, rebounding from a decline of 0.3 % in July, according to the National Bureau of Statistics.
• On a monthly basis, the CPI rose 0.3% month-on-month, up from 0.2% growth in July.
• Average CPI for the January-August period increased 0.5% year-on-year.
• Core CPI, excluding volatile food and energy prices, was 0.8% up year-on-year.
• The reading reflected a season that transportation, tourism, accommodation, and catering were typically boosted by the summer travel rush – this moderate uptick that fell behind the seasonal pace indicated consumers’ spending in other categories remained depressed.
• Among eight categories, clothing prices dropped by 0.1% month-on-month, following a fall of 0.3% in July, while the price of living products and household services saw a decline of 0.3%, suggesting consumer spending is still curbed by low expectations and high worries about an economic slowdown.

Producer inflation offers positive sign of rising factory demand

• The producer price index(PPI) increased for the first time since November last year on a monthly basis. Average PPI in the first eight months of the year was 3.2% year-on-year.  
• PPI rose 0.2% month-on-month in August, and its contraction narrowed to (-3.0%) in August from (-4.4%) in July.
• Analysts believed this could reflect the effects of measures introduced since the end of July to boost domestic demand continued to emerge, raising hope for a sustained momentum of China’s economic recovery in the rest of this year.
• In addition, industry data from Mysteel showed that the number of newly started projects surged to 5,709 in August, increasing 68.21% from July, with the total value of those projects rising by 48.25% month-on-month.
• This was more evidence that supporting policies targeting properties and infrastructures have taken immediate effect in directing stimulus in constructions, and this will benefit metals and other materials demand related to construction.

Industrial production strengthens (9/15)

• Industrial production climbed to 4.5 % in August year-on-year, accelerating from a rise of 3.7% in July, aligning with the upbeat momentum in manufacturing suggested by PPI data released early this week.

EU probe into Chinese EV exports

• The European Union launched a probe into EVs imported from China, claiming that huge Chinese state subsidies caused unfair competition in its market.
• The EU’s move came as China surpassed Japan, being the world's largest auto exporter this year, fueled by a rapid growth in EVs in the global market.
• Industry experts said China has scrapped most subsidies to public buses and private passenger cars since 2022. However, the investigation into Chinese EVs added more uncertainty to China’s trade with the EU.
• Decoupling measures have resulted in bilateral EU/China trade slowing to 0.24% year-on-year in the first July months this year from a growth of 10.07% last year. 
• Chinese EVs have been an important economic driver when most of the other industries were struggling. EU is currently the largest overseas market for Chinese EV makers, with more than half of exports shipping to the EU countries.
• It will be a severe hit to China’s exports and economy should the EU add the Chinese EVs as another restrictive trade target, in addition to earlier set trade barriers on Chinese solar products.

Bank cuts Chinese economic growth forecast

• JP Morgan's global research downgraded China’s economic growth this year to 4.8%, below the official target of around 5%, attributing the growth slowdown to China’s huge debt burden and ongoing property slump.
• The bank noted that China’s high level of debt problem was unlikely to trigger economic collapse as foreign participation in China’s debt markets was relatively low, and China’s debt risk in this scenario is more about the knock-on effect to developing countries, notably commodity exporters.

Fixed investment growth slows

• Fixed-asset investment (FAI), including investment in infrastructure, property, machinery, and equipment, saw slower growth at 3.2% in the first eight months of the year, down from 3.4% in the last reporting period.
• Investment from the private sector slipped steeper to (-0.7%) from (-0.5%) in July, while investment expansion from state-backed enterprises also slowed from 8.1% in July to 7.4% in August.
• Policy-oriented infrastructure investment slowed to 6.4% from 6.8% in July, reflecting restrictive government spending limited by huge debt in local governments.
• Investment in the property sector fell steeper to (-8.8%) year-on-year from (-8.5%) a month prior.

Unemployment falls marginally

• Urban unemployment rate marginally improved to 5.2%, 0.1% lower than 5.3% in July.

Summarized from StoneX research by Paul Walton, Financial Writer: Paul.Walton@StoneX.com