China: Growth momentum remained weak in August – Standard Chartered

Real activity appears to have weakened in August amid weak domestic demand. We maintain our 2024 growth forecast at 4.8%, but see some downside risks. We expect further cuts to the reserve requirement ratio (RRR) and the policy rate by year-end, as well as faster fiscal spending under the current budget, say Standard Chartered economists Hunter Chan and Shuang Ding.

The 5% growth target seems increasingly challenging

“Growth momentum remained weak in July-August following a significant quarterly slowdown in the second quarter. Industrial production (IP), retail sales, and fixed asset investment (FAI) growth in August fell short of expectations due to weak domestic demand and adverse weather. The unemployment rate rose further to 5.3% from 5.2% in July, partly due to the graduation of college students. Meanwhile, the three-year compound annual growth rate (CAGR, with 2021 as the base year) for most real activity indicators improved, balancing the generally negative picture.”

“Specifically, IP growth eased to a five-month low of 4.5% year-on-year in August from 5.1% in July. Seasonally adjusted retail sales were virtually flat after a brief rebound in July. Services output index growth fell to a four-month low of 4.6% year-on-year. Private investment contracted for a second consecutive month, dragged down by the weak real estate sector. Infrastructure investment growth also slowed further. According to our estimate, GDP growth remained below 5% year-on-year in August.”

“We maintain our 2024 growth forecast at 4.8% as we expect further policy support by year-end. We expect the government to focus on accelerating government bond issuance and fiscal spending to fully utilize fiscal space under the approved budget. We also expect the People’s Bank of China (PBoC) to cut the reserve requirement ratio (RRR) by 25 basis points this month and lower the policy rate, i.e. the 7-day reverse repurchase rate, by 10 basis points in the fourth quarter.”