Consumption slack adds to Chinese problems; industrial data beats estimates on fiscal support
The data on Chinese economy released today offered a mixed impression about the government’s attempts to fix inefficiencies and ease recession risks. Slowing retail sales was unexpectedly countered by uptick in industrial output and investment in fixed assets which is quite surprising and worrying at the same time.
Together with the data on loans that were released yesterday, Wednesday figures suggest that economy conditions will continue to degrade at least until the end of 2018, since the government was a bit late to come up with stimulus measures.
The authorities have increased fiscal support for the manufacturing sector and the population (through taxes), while reducing monetary support, thus avoiding direct pressure on interest rates and weakening the yuan, which in turn leads to capital outflows. The number of fresh loans issued by the banks fell to 697 billion yuan in October, from 1,380 billion in September, i.e., almost halved. The tightening of credit conditions was priced in the market, but at a less rapid pace, at about 904 billion yuan.
The growth rate of money supply (aggregate M1) slowed down to 2.7% in annual terms against a 4.2% forecast. The solid signal about shrinking money supply failed to provide substantial support to the yuan, which oscillates in a narrow range around the level of 6.94 per dollar. However, the intensity of the outflow of capital seems to have weakened, since the clear impulses upward in the intraday movement have not been traced since the beginning of this week.
One of the key prospective pillars of the Chinese economy is a huge untapped potential for consumption, while it does not allow the authorities to rely on it yet, since it functions poorly in “stressing conditions”. Domestic consumption, which has grown at an accelerated pace since recent times, slowed in October. Retail sales, a less elastic economic indicator to the decline in household income, (unlike, for example, durable goods), slowed down from 9.2% to 8.6% in October, the lowest since May of this year. The prolonged decline in car sales in China has put the world’s largest car market on the verge of downturn for the first time since 1990. Sales of garments reached a two-year low, indicating a decline in consumer optimism.
Reduction in consumer spending could be explained by several reasons, such as mortgage debt, which requires an increasing proportion of income, falling welfare due to a decline in the stock market and declining return on investments. Tightening access to credit financing (as we see from the data on new loans) makes it difficult to smooth fluctuations in income.
The state’s fiscal support in the form of tax cuts on cars, imports, and an increase in income tax from 3,500 to 5,000 yuan may have arrived a little late, and deterioration in consumer confidence has led the population to save more and spend less.
The government has so far managed to “hold onto” the falling production, what we see from the data today. The pace of industrial output rose to 5.9% in October, contrary to forecasts of a slowdown to 5.8%. Positive economic figures are diluted into the fears of escalation of the trade war with the US. And recovery of the Chinese industrial sector is unlikely until the “war” with the US is not over. Recent data on US export orders for Chinese factories pointed to a 30% decline in annual terms.
The state is increasing its market participation as key client, focusing on infrastructure projects. For example, production of cement in October jumped by 13.1%.
The forward-looking indicator of investment in fixed assets rose unexpectedly in October, although it is unclear whether this indication came from the Administration (again, thanks to the “guarantees” in the form of infrastructure projects) or the corporate expectations really turned out to be more resilient than consumer ones. The main indicator rose by 5.7% in October against expectations of 5.5%, while investments in the private sector grew by 8.8% in annual terms.
SHCOMP was not impressed with the economic data, rolling back almost 1% on Wednesday to 2632 points.
In the UK, labor market data showed that the economy is recovering at a moderate pace. Salaries rose in line with expectations, while quarterly changes in unemployment were worse than expected. The pound is entirely absorbed by the events of the Brexit, with development being shrouded under a “three-layer fog” of speculations that benefit traders and algos. The political deadlock in which May’s conservative party found itself once again allowed GBPUSD to play below 1.29, but yesterday and today the pair is recovering in response to economic data and speculation about the progress in the negotiations.
One of the latest encouraging phrases of the Prime Minister was that “negotiations are in the endgame,” and the fact that the “Brexit draft has been agreed”, although it’s not the first time that such promises are coming out of the mouth of officials. GBPUSD is likely to linger at 1.30, as it is a convenient point to bet on a favorable Brexit outcome.
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