JLL Chief Economist comments on China's August 2022 macro data

Bruce Pang, Chief Economist and Head of Research, JLL Greater China

In general, China's August macro data recorded better-than-expected and overall improvement. Heatwaves, electricity curbs and travel restrictions may bring near-term disruptions to China’s industrial output and retail sales. Domestic demand remains lagged and external demand are also softening. For example, the contraction of PMI sub-index of new orders, the subdued core CPI and deep falls in metal costs are all signs of weak demand. More pro-growth policies would be needed to iron out the near-term shocks.

We think investment will be a major driver for growth stabilization in the coming quarters, especially when exports are slowing down and consumption is not yet picking up. Investment, infrastructure investment in particular, could be among the few highlights. But to revive the economy and to provide respectable growth in the long term, more steps to spur corporates’ investment and to encourage industrial upgrades and innovation would be needed.

China is easing its policy stance and stepping up efforts to salvage the housing market - from urging banks to lend more, to easing mortgage costs and borrowing limits, and relaxing curbs on home buying. Due to disruptions from the sporadic COVID-19outbreaks, home sales and prices in August remain bleak. We think the market sentiment and property investment will gradually improve in the next few months. The construction of rental housing and affordable housing could also provide some buffering for the property sector.

We reckon that with every challenge we face, there is a great opportunity hidden. Developers with solid fundamentals may think about shifting their business model towards a more commercial property-focused approach. Industry leaders could also benefit from consolidation and investors from undervalued assets. And for China, this could lay the groundwork for a healthier economy in the future.

September’s figures may see further marginal improvement, suggesting by high-frequency data. As China stepped up its economic stimulus and policy spurs, we expect China’s GDP growth to accelerate in the next several quarters. Speeding up investment and construction, stabilizing the job market and boosting consumption would be key for sustained economic recovery.

The latest data shows that both exports and imports lost momentum in August. And we expect the boost from exports may continue to wane in the next several months due to the high-base effect and the softening global demand.

That said, the government have roll out full sets of policies support and stimulus to boost exports, providing subsidies to firms, securing electricity for firms, streamlining the logistic and supply chain, and launching new pilot areas for cross-border e-commerce. With policy support, we think the net exports could contribute more that 20% of China’s GDP growth for the third quarter and the full year.

We think China’s inflation is relatively benign and largely manageable in the near term. The soft price data for August gives the PBoC room to stay accommodative, as the domestic recovery continuing to face pressure. Inflation won’t be a major constraint to monetary easing anytime soon.

China’s leaders have signalled a renewed sense of urgency to shore up the flagging economy, since the third quarter will be a critical time for policy action to prevent a further loss of economic momentum.

We think massive additional stimulus will not be around the corner but fine-tuning and follow-up of existing policy measures. Policymakers are not going to use tools with only short-term gain yet longer-term pain to rescue the economy amid unexpected headwinds.

But policymakers are well aware of the Sino-US policy split and the importance of keeping the RMB exchange rate largely stable. We don’t expect interest rate cut in the near term, as officials will want to wait to see the effect of August’s surprise rate cut before acting again and not widen the Sino-US interest rate gap.

We think further easing will come with quantity-based tools to provide liquidity support as well as structural tools for focus areas such as manufacturing and green investment. Other policy options, including a RRR cut, remain on the table.

The focus of policy should be on boosting domestic demand, which requires coordinated fiscal and industry policies, and monetary policy should only play a supporting role. Restarting the growth engine by propping up domestic demand and consumption with stabilized expectations remains a key, yet challenging policy priority.