East Asia Econ

With a bounce in reported retail sales, it looks like economic growth in October got back to the government's 5% growth target. Overall, though, the tone of the data was rather mixed, with real estate activity in particular still extremely weak.

The bond swap does represent substantive policy. But there still isn't support for consumption, so this does look like an effort to put a floor under growth, rather than produce a new upcycle. And while that will probably be successful, stability will be endangered by a new round of Trump tariffs.

A chart pack arguing that consumption hasn't been as weak as is often imagined, but that downside risks are growing as wage and property income falls. Policy solutions need to overcome the weakness of non-wage incomes, the strength of savings, and the pro-investment official mindset.

Likely driven by the sentiment-driven rise in prices, the manufacturing PMI bounced back above 50 in October. But there was barely any change in either the services or construction, PMIs, and both will need to improve to think that the economy really is turning around.

The government yesterday published its monthly series for the profits of the industrial sector. I am always a bit sceptical of the quality of these data. But if you want a trigger for the recent macro policy push, then the sharp fall in profits in September fits the bill.

The slump in confidence and retail sales don't indicate a major cyclical weakening of consumption. That's partly because households have been running down excess savings from covid. But with savings now normalising, consumption is becoming more vulnerable to the deterioration in the labour market.

Looking at today's data, the driver of all the recent policy activism is to get growth back to the 5% target. That doesn't suggest a big rebound in the nominal growth that equity investors need. The upside risk is this policy push is happening when there are tentative signs of property stabilising.

Cyclically, credit is very weak, especially private sector borrowing. But credit is still rising relative to GDP. That's partly because of government borrowing. But it is also because of weak nominal GDP growth, and that is unlikely to change until the sharp fall in M1 relative to M2 reverses.

Exports dropped quite sharply in September. China is still making share gains in autos especially, but this is another sign that the best of the recovery in the regional export cycle is probably now done. That matters for China when exports have been the strongest sector of the economy.

Core inflation, which took one step-down during covid, has this year dropped again. Indeed, China has now been in sequential core CPI deflation since May. This implies rising real interest rates, and, with PPI turning down again too, a worsening debt burden.

The MOF presser today was underwhelming, in both quantity and quality. The one real, positive change is allowing fiscal funds to be used to address the supply overhang in property, but only at the local government level (and, it seems, using existing funds). Markets are unlikely to be impressed.

My base case - that the economy won't turnaround without fiscal – isn't especially differentiated. But the reports of stronger real estate sales in the holiday highlight a risk case: that the equity rally mobilises household savings and boosts price expectations, lifting the economy without fiscal.

I had an op-ed piece in today's Nikkei Asia. The headline argument is that monetary policy isn't sufficient to boost growth. On its own, that isn't much of a differentiated view. The nuance is the reasoning: China has monetary policy independence, so Fed cuts in themselves don't change anything.

To think the equity recovery is lifting overall growth, things to watch include: the yield curve; real estate debt; PBC base money; and household deposits. Since Friday, the YC and real estate debt have moved, but not significantly yet. Base money and HH time deposit data are lagging.

Equities say that data are now dated, with PBC policy meaning a decent recovery is in the works. But in assessing whether that's right, the data are important, showing how much work policy needs to do. The PMIs were weaker again in September, with the construction PMI, especially, rarely worse.

I've already posed the question of why the PBC only cut 20 bp. Today, I've got a follow-up: why wasn't fiscal announced at the same time? Reports suggest that is in the works, but China is best-placed of anywhere to do coordinated monetary-fiscal. It feels significant that this didn't happen.

This to me is the interesting question about yesterday: given weak prices, and now CNY appreciation, why wasn't the rate cut bigger?

China's imports are two-speed. That's like the economy, but with a big difference: whereas for macro it is property that is weak while mfg is strong, for imports it is commodities that are more resilient than capital goods. Like the overall macro muddle through, that resilience likely can't last.

August data suggest GDP is now only growing by around 4% YoY. The headwinds remain property activity, which dropped again in August to new lows, and retail sales, which has now contracted MoM in five of the first eight months of 2024. Sustaining muddle through is getting much more difficult.

Today's industrial price data for the first 10 days of September and property prices for August show intensified deflationary pressure. Yesterday's monetary data were weak. The PBC said yesterday that it will focus on price stability, but it also said it has plenty of other things to do as well.

More than 12M ago, we argued yields should fall. In that respect, today's drop to record lows isn't a surprise. We don't see anything fundamental yet to cause a change in direction. That's based on four factors: the PBC's reaction function, inflation, household savings, and the CNY.

It seems increasingly unlikely that exports can offset the weakness of domestic demand. Today's export data for August weren't strong. Volumes might be better, but the regional export cycle is likely peaking, and that at a time when China's domestic demand seems to be weakening further.

MoM core CPI fell again in August, and while perhaps a bit too early to pronounce that China is definitively in core deflation, it is getting close. PPI deflation also worsened, and the leads suggest that will continue. Despite stronger food prices, it is likely interest rates continue to fall.

Rather than thinking a weaker USD will be a catalyst for a stronger Chinese cycle, we worry more that a stronger CNY means even more downside risk, being another reason to conclude that the muddle through of the last 18M is running out of road.