Analysis: What’s Behind China’s Diverging Economic Data

Country’s economy is experiencing a structural recovery rather than the full-blown rebound expected at the start of the year

On Aug. 29, in Ezhou, Hubei province, workers install equipment at a manufacturing company. Photo: VCG

China’s economic data for October revealed diverging trends, influenced to some extent by seasonal factors and base effects.

The overall economy is going through a structural recovery rather than a full rebound, dragged down by issues such as insufficient total demand, dwindling external demand, declining prices, and waning business confidence. Continuous policy support is needed to stabilize growth.

Inconsistent data trends

In October, the official manufacturing purchasing managers index (PMI), consumer price index (CPI), and export data were all worse than market expectations and the previous month’s readings, but industrial production and retail sales data beat expectations and the previous month’s readings. What should we make of these differences?

In my opinion, the PMI and CPI were affected by seasonal factors. The long National Day holiday in October prompted businesses to move up some production to September, resulting in an upswing in that month’s manufacturing PMI, which was followed by a dip in October. After the holiday, a drop in demand led to price decreases in food and tourism services. That, combined with an increase in pork and vegetable supplies in October, led to both year-on-year and month-on-month declines in the CPI.

The gauges for consumption and industrial production suffered from an unfavorable base effect. Take the consumption data as an example. Whether we conclude that consumption boomed in October based on the increase from 5.5% year-on-year in September to 7.6%, or that consumption weakened based on the fact that the two-year average growth rate fell from 4% to 3.5%, neither was consistent with the actual situation, because both data sets were significantly skewed by their baseline comparisons. In October last year, the Covid-19 pandemic hurt consumption, with retail sales falling 0.5% year-on-year.

Positive readings

Despite the seasonal and base-effect distortions, October’s data offered signs of an ongoing economic recovery in several key areas:

- Industrial production improved, with the seasonally adjusted value-added industrial production of major enterprises growing 0.39% month-on-month, surpassing the September growth of 0.36%.

- The gauge for expectations for future production in the official manufacturing PMI stood at 55.6, staying above 55 for the fourth consecutive month.

- Consumption continued to recover, with the four-year average growth rate in retail sales coming in at 3.1%, 3.2%, 3.9% and 4% respectively for July, August, September and October.

- Infrastructure investment in water transportation, railway transportation, and electricity, heating and gas all grew in excess of 20% year-on-year in the first 10 months combined.

- Investment in high-tech industries grew 11.1% year-on-year for the January-to-October period, far exceeding overall fixed-asset investment growth of 2.9%.

- The job market improved, as the surveyed urban unemployment rate in 31 major cities fell to 5% from 5.2% in September.

Challenges remain

As life returns to pre-pandemic norms, China’s economy should have achieved much steeper growth rates. However, the current trajectory remains relatively flat. That is mainly because external uncertainties still abound, and domestic demand remains insufficient.

- Declining external demand dragged down exports. In October, the measure for new export orders in the official manufacturing PMI dropped to 46.8 from 47.8 the previous month. Customs data show that despite a notable decline in the base, the year-on-year drop in exports still widened to 6.4% from 6.2%.

- A series of government measures brought marginal improvements to the real estate sector, but the property market remained in a slump, suppressing any possible rebound in investment. Property investment in October slid by 11.3% year-on-year, the same as in the previous month.

- Consumer sentiment remained subdued. In the first three quarters, the share of per capita consumer spending in disposable income stood at 66.4%, still below the pre-pandemic level of 67.6%.

- Businesses showed little appetite to make investments, as they faced numerous challenges in production and operations. For example, year-on-year declines in the producer price index suppressed companies’ revenue and profits, and longer collection periods for accounts receivable hurt their cash flows.

More support needed

While some measures have had an effect, additional efforts are still needed.

First, the real estate stimulus worked primarily in higher-tier cities. In October, the year-on-year decline in real estate sales by floor space widened to 11% from 10.1% the previous month, while in sales by value narrowed to 8.1% from 13.6%. In 30 major cities, real estate sales by value in October improved to a 2.6% year-on-year decline from a 22.3% drop. This shift may be attributed to the relaxation of homebuying curbs, with higher property prices in high-tier cities driving an overall improvement in sales by value. However, the sluggish performance in low-tier cities may be dragging down the overall sales by floor space.

Second, cutting interest rates on existing mortgages would give homeowners less of an incentive to pay off their loans early, which would take some of the pressure from household deleveraging off the economy.

Third, special refinancing bonds can allow local governments to swap high-interest hidden debt for government bonds, reducing interest payments and lowering debt risks. In addition, local governments would be able to use proceeds from these bonds to pay some of what they owe to companies, which would improve the latter’s cash flows and bolster their confidence.

Several other policies are worth further attention:

- Recent increases in debt risks for some real estate developers have prompted the Central Financial Work Conference to call for impartial treatment to meet the reasonable financing needs of different ownership types of property developers.

- Acceleration of the construction of affordable housing, urban village redevelopment, and “dual-use” public infrastructure projects that can be used for both normal and emergency situations.

- The central government’s plan to issue 1 trillion yuan ($141.2 billion) in special treasury bonds in the fourth quarter will allocate funds for post-disaster recovery and key flood control projects, among other things.

If implemented well, these policies can stimulate real estate and infrastructure investments, fostering economic growth.