China's economy perks up

·3-min read

China's economy has shown surprising resilience in August, with faster-than-expected growth in factory output and retail sales shoring up a fragile recovery, but a deepening property slump weighed on the outlook.

The better-than-expected figures show the world's second-largest economy is gaining some steam, after narrowly escaping a contraction in the June quarter and lifting recovery prospects marginally for the rest of the year.

Industrial output grew 4.2 per cent in August from a year earlier, the fastest pace since March, according to the National Bureau of Statistics (NBS). That beat a 3.8 per cent increase expected by analysts in a Reuters poll and July's 3.8 per cent expansion.

Retail sales rose 5.4 per cent from a year ago, the quickest in six months and also beating forecasts for 3.5 per cent growth and the 2.7 per cent gain in July.

"This is due to a lower base for comparison - the Delta wave was weighing on economic activity in August 2021," said Julian Evans-Pritchard, a China economist at Capital Economics.

Although the upbeat data lifts some of the gloom hanging over the sluggish recovery, which had been clouded by weak trade data and slow credit growth, Evans-Pritchard does not expect the strength to sustain into September.

"And while the current virus wave may have peaked, activity is set to remain weak over the coming months amid the deepening property downturn, softening exports and recurring COVID-19 disruptions," he said.

The auto industry was a big driver of both factory output and retail sales, with new energy vehicle production surging 117 per cent, helped by government incentives for cleaner cars.

However, outages at several state oil refiners and independent plants and thinning margins kept crude throughput near two-year lows. Daily coal output also slipped to a three-month low.

With few signs China will significantly ease zero-COVID soon, some analysts expect the economy to grow just 3 per cent this year, which would be the slowest since 1976, excluding the 2.2 per cent expansion during the initial COVID hit in 2020.

In contrast to the upbeat activity data, the property sector contracted further in August as home prices, investment and sales extended losses.

Property investment last month fell 13.8 per cent, the fastest pace since December 2021, according to Reuters calculations based on official data.

New home prices fell 1.3 per cent year-on-year in August, the fastest since August 2015, extending a 0.9 per cent decline in July.

Once a key driver of economic growth, China's property market has lurched from crisis to crisis since mid-2020 after regulators stepped in to cut developers' excess leverage.

The property woes have weighed on the world's second-largest economy, with policymakers now scrambling to prevent a protracted downturn.

Amid weak consumer and business confidence, companies are wary of expanding and hiring more workers. The nationwide survey-based jobless rate eased slightly to 5.3 per cent in August from 5.4 per cent in July. Youth unemployment stayed high at 18.7 per cent, after reaching a record 19.9 per cent in July.

Policymakers have announced over 50 economic support measures since late May and stressed this quarter was a critical time for policy action.

Complicating the case for looser monetary support, however, are rapid declines in the yuan against the US dollar, which has worried policymakers.

The yuan weakened past the psychologically important 7 per dollar level for the first time in two years on Friday, pressured by a buoyant dollar and strong market expectations for an even more aggressive US interest rate hike next week.

Bruce Pang, a chief economist at Jones Lang Lasalle, doesn't expect China's central bank to cut interest rates in the near term.

Easing could instead come through liquidity measures and support for manufacturing and green investment.

"Other policy options, including a reserve requirement ratio cut, remain on the table," Pang said.