I. CHINA’S MACROECONOMIC PERFORMANCE
China’s economic performance declined in October. Official statistics revealed a monthly manufacturing PMI of 49.2, 0.9 percentage points lower than in September. Large-sized manufacturers recorded a PMI of 50.1, 1.0 percentage point down from a month ago; the two figures for medium- and small-sized manufacturers were 48.9/0.8 percentage points and 48.2/0.1 percentage points, respectively.
Industrial production fell back. In October, industrial value added of businesses above designated scale increased year on year by 5.0%, 1.3 percentage points down from September. Manufacturing’s value added rose year on year by 5.2%; mining, 4.0%; power, heat, gas and water production and supply, 4.0%. Year-on-year growth of general and dedicated equipment was 2.0% and 3.0%, respectively; that of hi-tech manufacturing, 10.6%. During January and September, total profits of industrial businesses above designated scale across the country reduced year on year by 2.3%.
Export growth dipped into the negative territory. In October, China’s total USD-denominated export fell year on year by 0.3%, 6.0 percentage points lower than in September. Total import was down by 0.7%, 1.0 percentage point lower than in September. And total trade surplus was 85.15 billion USD, 0.41 billion USD higher than a month ago.
Consumption contracted. October saw total retail sales of consumer goods decline 0.5% year on year, its growth 3.0 percentage points lower than in September and its month-on-month growth, 0.7% lower. Specifically, merchandise retail sales increased year on year by 0.5%, 2.5 percentage points lower than the growth in September; catering revenue recorded a negative growth of -8.1%, 6.4 percentage points higher than the drop in September; automobile sales increased year on year by 3.9%, 10.3 percentage points lower than in September. From January to October, China’s total online retail sales grew by 4.9%, in which the online retail sales of physical goods climbed up by 7.2%, accounting for 26.2% in total retail sales of consumer goods.
Fixed asset investment slowed, and real estate investment continued its downward trend. Over the first ten months of the year, China’s total fixed asset investment grew year on year by an accumulated 5.8%, 0.1 percentage points lower than the number for January-September. Private fixed asset investment increased at an accumulated 1.6% year on year, 0.4 percentage points lower than in the first nine months. Specifically, manufacturing investment grew 9.7% year on year; infrastructure investment in the tertiary industry increased year on year by 8.7%; real estate development investment dropped year on year by 8.8%, 0.8 percentage larger than the drop in January-September. From January to October, floor area sold of commodity housing reduced year on year by 22.3%, 0.1 percentage points higher than the drop in January-September; and the total floor area started during this period decreased year on year by 37.8%, 0.2 percentage points smaller than the drop in January-September.
Core CPI remained low with PPI falling into negative territory. October witnessed a year-on-year CPI growth of 2.1%, 0.7 percentage points lower than a month ago. Specifically, non-food price grew year on year by 1.1%, 0.4 percentage points down from September; food price, by 7.0%, 1.8 percentage points down from a month ago. Core CPI excluding food and energy prices increased year on year by 0.6%, same as September. In October, China’s PPI grew year on year by -1.3%, 2.2 percentage points lower than September.
II. MACROECONOMIC ENVIRONMENT
The global economy continued to decline. The J.P Morgan Global Composite PMI stood at 49.0 in October, 0.6 percentage points down from September; J.P. Morgan Global Manufacturing PMI came in at 49.4, 0.4 percentage points down from a month ago. Manufacturing PMI in the United States dropped from 50.9 in September to 50.2 in October, while that in the Eurozone fell back to 46.4 from 48.4 in September, and that in Japan, from 50.8 in September to 50.7 in October. CRB commodity prices decreased by 1.7% month on month.
The growth of social financing slowed down. The year-on-year growth rate of M1 in October was 5.8%, down 0.6 percentage points from September; that of M2 was 11.8%, down 0.3 percentage points from September. The growth of social financing was 10.3% year on year, down 0.3 percentage points from September. October recorded newly formed social financing of 0.9 trillion yuan, a decrease of 2.6 trillion yuan from September. Among them, newly issued government bonds (Treasury bonds + local government bonds + special bonds) was 0.28 trillion yuan, down 0.27 trillion yuan from September; newly issued corporate bonds stood at 0.65 trillion yuan (LGFVs included), down 1.68 trillion yuan from September; new debt of the household sector was -0.02 trillion yuan, down 0.67 trillion from September.
The 7-day repo rate rebounded. The 7-day interbank pledged repo rate averaged 1.81% in October, up 10 basis points from September. The short-term liquidity spread represented by the difference between the 3-month SHIBOR and the 3-month Treasury bond yield was 0.11%, same as September. The term spread represented by the difference between the 10-year Treasury bond yield and the one-year Treasury bond yield increased by 7 basis points from September to 0.93%; the credit spread represented by the difference between the 10-year AA-rated bond yield and the 10-year Treasury bond yield declined by 13 basis point from September to 1.40%.
III. NEAR-TERM OUTLOOK AND RISK WARNING
1. Resurgences of the pandemic all over the country are intensifying the downward pressure on the economy.
2. The downturn in the real estate market is a drag on overall credit expansion, and demand remains weak.
3. The declining international demand can be a cause for concern for Chinese exporters.
VI. POLICY SUGGESTIONS
1. Maintain sufficient exchange rate flexibility.
2. Reduce the interest rate by 25 bps each time until the employment and growth targets are reached.
3. Provide fiscally subsidized, new types of bonds and policy loans to boost investment in public goods and quasi-public goods infrastructure projects with limited returns. Aim at an annual growth in infrastructure investment of not lower than 10%.
4. Establish real estate funds to stabilize normal financing for real estate companies. Boost market-based competition on mortgage rates, so as to reduce household debt burdens. Start pilot programs to convert some of the developers’ housing stock into subsidized rental housing, to reduce the developers’ debt burdens.
5. Establish special funds to help market entities battered during the pandemic get back on their feet.
