China’s economy slowed again in November as retail sales and industrial production weakened, creating a challenging backdrop for policy makers who gather next week to set the tone for the year at their annual Economic Work Conference in Beijing.
Industrial production growth decelerated to 5.4%, below all 38 economists’ estimates. Retail sales — formerly a pillar of support for the economy — posted the weakest performance since May 2003, rising 8.1% from a year earlier. Chinese stocks fell along with the currency as data signalled a deepening slowdown.
It wasn’t all bad news though. Fixed-asset investment growth firmed, expanding 5.9% in the first eleven months of the year, and the surveyed jobless rate dropped marginally to 4.8%. That suggests stimulus to cushion the slowdown is beginning to take root.
The data point to a continuation of 2018’s targeted approach to support growth. People’s Bank of China Governor Yi Gang indicated as much late Thursday, saying that monetary policy will remain supportive. Economists expect such support to involve another 200 basis points of reduction to the required reserve ratio for major banks, a measure that’s been used several times this year, according to Bloomberg survey published Friday.
“With consumers cutting back, and output sputtering, the need for stabilization measures is becoming more pressing,” said Frederic Neumann, co-head of Asian economics research at HSBC Holdings Plc in Hong Kong. “Even if the clouds on the trade front lift, at least temporarily, softening domestic demand continues to weigh on growth. Further policy easing will be necessary to arrest the slide.”
The one-year lending rate, which has a broader influence on the economy, is forecast to remain unchanged at 4.35% through the first quarter of 2021, according to the Bloomberg survey, signaling that the central bank is expected to avoid adding downward pressure on the currency.
Looming over this year’s economic policy meeting is the urgency of reaching a sustainable agreement on trade with the U.S. before a deadline for higher tariffs expires on March 1. China may see the need to announce further measures aimed at answering U.S. criticism, such as steps to open up protected markets.
China’s economic policy summit nears, overshadowed by trade
Bloomberg’s monthly collation of early indicators correctly predicted the grim November numbers. An expected tapering of strong exports as the ‘front loading’ effect caused by the trade war fades means the first quarter is set to be challenging too.
“The worst is yet to come,” said Sue Trinh, head of Asia FX Strategy at RBC Capital Markets in Hong Kong. “Policymakers will be very worried, particularly with consumption growth falling off a cliff.”
That said, there’s increasing evidence that investment has stabilized. Manufacturing investment growth accelerated for the eighth straight month in November, with state firms leading the way. While that mightn’t be enough to brighten the current picture, it shows that stimulus measures announced during the year are having some effect.
That may encourage more, even as officials work continue to curb financial-sector risks.
What our economists say …
Activity data for November show further weakening in the Chinese economy — with flagging private consumption the most worrying sign. That’s reflected in a notable slowdown in retail sales growth. Stable demand for consumer staples paired with waning demand for consumer discretionary goods suggests that the slowing economy has undermined confidence.– Chang Shu and David Qu, Bloomberg Economists
At a meeting of the Politburo led by President Xi Jinping, top leaders signalled that campaigns announced last year against financial risk, pollution and poverty will continue. The nation should further stabilize employment, finance, trade, foreign investment and boost market confidence in 2019, according to a statement published by the official Xinhua News Agency.
On Thursday, the PBOC’s Yi highlighted the balancing act that officials face — supporting growth while refraining from launching large-scale stimulus that would spur financial-sector bubbles and destabilize the economy.
“China won’t have double-digit growth like in the past years,” and it’s stayed around its potential growth rate in recent years, he said.
© 2018 Bloomberg L.P