China outperformed manufacturing output and consumption estimates, but the property still hurts growth. Although China’s retail sales and industrial production growth in October exceeded forecasts, the country’s overall economic picture showed notable areas of weakness, with the crisis-ridden real estate sector still threatening a full-blown recovery.

The second-biggest economy in the world has found it difficult to recover from the COVID-19 pandemic because of challenges posed by the property market, dangers associated with local government debt, poor global growth, and geopolitical concerns. Authorities are under pressure to implement further stimulus as a flurry of policy support initiatives has only shown limited benefits.

Data from the National Bureau of Statistics (NBS) revealed on Wednesday that China’s industrial production climbed 4.6% year over year in October, above forecasts for a 4.4% gain in a Reuters poll. This represents an acceleration from the 4.5% rate reported in September. Additionally, it was the biggest gain since April.

After increasing by 5.5% in September, retail sales increased by 7.6% in October, with improvements in restaurant and car sales growth. This was the quickest pace of growth since May. Due to the low base impact in 2022, when COVID restrictions upset consumers and companies, analysts had predicted that retail sales would expand by 7.0%.

Regarding the positive data surprise, analysts expressed caution, pointing out that the property industry continues to be a weak area in the economy and that significant changes still need to be implemented before there can be a long-term, sustainable recovery in growth.

“Year-over-year figures cannot reflect the actual momentum of the economy due to the impact of holidays and low base effect in 2022,” ANZ senior China analyst Xing Zhaopeng stated.
He said that month-over-month data indicates “increasing deflationary risks” and a further weakening of economic momentum.

Oxford Economics’ China economist Louise Loo said that even though external demand rebounded last month as destocking pressures subsided, sustained weakening in the market might still hurt industrial production.

Earlier in October, during the eight-day Golden Week vacation, consumption did not advance much either. According to experts, travel during that period fell short of official expectations as consumers worried about their jobs and future income growth in an unstable labor market.

According to NBS statistics, the 5.0% national survey-based unemployment rate remained constant from September to October. June saw a record high of 21.3% for youth unemployment, but the data wasn’t accessible since the statistics agency had ceased releasing it in July.

Though the benefits have been slight thus far, China has been stepping up its attempts to revitalize its post-COVID economy in recent months with many policy assistance measures.

Wednesday’s positive news coincides with many other October indicators that have been made public in recent weeks, suggesting a subdued growth pace. A faster export decline, sluggish household borrowing, falling consumer prices, and continued manufacturing deflation accompanied unexpected import growth.

The challenge ahead of the authorities is problematic since any strong monetary assistance would erode the already fragile yuan and deepen the interest rate gap between China and the West, particularly the United States. Beijing is concerned about a return to the big-bang fiscal stimulus of the past, which resulted in enormous debt and hampered the economy, as it may exacerbate capital outflows.

Although a full-blown recovery is still some way off, the economy expanded faster in the third quarter than most analysts had predicted. The government had targeted 5% annual growth for the economy.

After shockingly low data on U.S. inflation overnight increased speculation that the Federal Reserve was nearing the conclusion of its tightening cycle, the yuan stayed close to a two-month high.

INVESTMENT AND PROPERTY DISAPPOINT

On Wednesday, the People’s Bank of China (PBOC), the nation’s central bank, rolled over maturing medium-term policy loans while increasing liquidity injections and maintaining interest rates.

The government also increased its projected 2023 budget deficit from 3% of GDP to about 3.8% last month in an unusual move to accommodate the upcoming issue of 1 trillion yuan ($137.10 billion) in sovereign bonds to boost the economy; the PBOC has already lowered banks’ reserve requirement ratios (RRR) twice this year. In the latter several months of this year, analysts generally anticipate another RRR decrease and a reduction in interest rates.

China’s property market, which the crisis has severely damaged, has not yet shown signs of recovery, even in spite of increased efforts to assist homebuyers through programs, reduced borrowing rates, and loosened limits on house purchases.

Following a similarly steep 9.1% decline in January–September, real estate investment plummeted 9.3% from January to October of last year.

With 2.9% year-over-year growth in the first ten months, fixed asset investment fell short of forecasts for a 3.1% increase. It increased by 3.1% between January and September.

The 0.5% decline in investment in the sector from January to October—a minor improvement over the 0.6% decline in the first nine months—indicates that private company confidence was also low.

Sheana Yue, a China economist at Capital Economics, stated, “Overall, the data published today suggest that the recovery was struggling to gain a strong footing at the start of Q4, but it was not nearly as weak as some had feared.”

“Policy looks set to remain supportive and possibly even step up to prevent the economy from backsliding.”