China's factory output disappoints, property sector stuck in doldrums

In August, industrial production grew by a mere 4.5% compared to the same period last year, representing the slowest pace of growth since March. This underwhelming performance is further exacerbated by the ongoing struggles in the property market, where housing prices continue to fall despite various government interventions aimed at stabilizing the sector. The dual challenges of tepid industrial activity and a stagnant real estate market highlight the pressing need for more robust economic stimulus measures to rejuvenate growth and restore confidence in the world’s second-largest economy. Without decisive action, these issues could have far-reaching implications for both domestic and global markets.

China's economic recovery hit a rough patch in May, with industrial output falling short of expectations and the property sector showing no signs of improvement despite policy support. While retail sales exceeded forecasts thanks to a holiday boost, the overall data released on Monday painted a bleak picture for the world's second-largest economy. Industrial production grew by 5.6% year-on-year, down from April's 6.7% and below the 6.0% increase predicted by analysts in a Reuters poll. This slowdown adds pressure on Beijing to implement stronger measures to stimulate growth and stabilize the economy.

In May, retail sales, an indicator of consumer spending, increased by 3.7% year-on-year, up from April's 2.3% rise and the fastest growth since February. Analysts had anticipated a 3.0% increase, partly due to a five-day public holiday earlier in the month. According to Goldman Sachs analysts, "May's activity data and our high-frequency trackers for early June indicate significant disparities across sectors - robust exports and manufacturing, relatively stable consumption, and persistently weak property activity." This highlights the uneven recovery within China's economy.

In the first five months of 2024, fixed asset investment increased by 4.0% year-on-year, slightly below the expected 4.2% rise. This was a slowdown from the 4.2% growth seen in the January to April period. Manufacturing investment showedsome growth but even that growth based on technological innovation is not enough to give a Philip to the Chinese economy.Apart from this, economists caution that escalating trade tensions with the West over China’s alleged over-capacity could pose additional challenges for Chinese solar and electric vehicle manufacturers.

Private sector investment grew by just 0.1% from January to May, down from 0.3% in the first four months, indicating continued weak confidence among private businesses. In contrast, state sector investment surged by 7.1% in the same period.

Exports provided a slight boost to the economy, with notable increases in steel and aluminium production in May. According to ZhaoPeng Xing, senior China strategist at ANZ, "Exports significantly fueled industrial growth and manufacturing investment, but the ongoing real estate slump continued to impact household consumption and investment." The property market downturn, coupled with high local government debt and deflationary pressures, remains a substantial drag on economic activity. These latest figures highlight the uneven nature of growth and underscore the need for additional fiscal and monetary policy support.

Amid narrowing interest margins for banks and a weakening currency, Beijing's ability to ease monetary policy remains constrained. Consequently, China's central bank kept a key policy rate unchanged on Monday, as anticipated. Zhou Hao, chief economist at GuotaiJunan International, noted, "We still anticipate a potential cut to the Loan Prime Rate (LPR) this month, especially for the 5-year tenor, to help banks retain household mortgage loans." However, Yu Xiangrong, chief China economist at Citi, predicts a total 20-basis-point policy rate reduction in the latter half of the year, but no LPR cut on June 20. These differing perspectives highlight the ongoing challenges and strategic considerations facing China's monetary policy.

China's economy expanded by 5.3% in the first quarter, surpassing expectations. However, analysts caution that achieving the government's annual growth target of around 5% may be challenging due to ongoing struggles in the property sector. Property investment dropped by 10.1% year-on-year from January to May, worsening from a 9.8% decline in the January-April period. Additionally, new home prices fell by 0.7% in May compared to April, marking the 11th consecutive month of decline and the steepest drop since October 2014, based on Reuters calculations of National Bureau of Statistics data.

Last month, the central bank introduced a relending program aimed at boosting sales of unsold affordable housing. During a media briefing on Monday, NBS spokesperson Liu Aihua mentioned that the property market is currently in a phase of adjustment, and it will take some time for the policy measures to show results. The property sector, which previously contributed to about a quarter of the economic output, has been affected by regulatory crackdowns, demographic shifts, and broader economic pressures. To support homebuyers, the government has implemented various measures, including relaxing mortgage regulations.

However, weak domestic demand has kept consumer prices in check, as confidence remains low amid the prolonged property sector crisis. In May, new bank lending rebounded, but the increase was much smaller than anticipated, and some key financial indicators hit record lows. Despite these challenges, the job market remained stable, with the nationwide survey-based unemployment rate holding steady at 5.0% in May, unchanged from April. In response, Beijing has committed to creating more jobs through major projects, boosting domestic demand, and implementing greater fiscal stimulus to support economic growth.