Chinese Activity Stable in August
Chinese retail sales edged down -0.1% MoM in August but were up 5.4% YoY. The improvement in the annual pace comes partly from base effects, but it is encouraging nonetheless. Most categories of spending have seen solid growth over the past year led by petroleum product sales up 17.1% YoY and auto sales up 15.9% YoY. Food and beverage incomes are up a solid 8.1% YoY with spending on daily necessities and household appliances also increasing at a solid rate, up 3.6% YoY and 3.4% YoY. The weak real estate sector was felt through building material sales down -9.1% YoY and furniture sales down -8.1% YoY. These weighed on the headline retail sales figure and make the consumption picture less rosy.

Chinese industrial production grew 0.3% MoM and 4.2% YoY in August. The slight improvement in the industrial sector saw manufacturing production up just 3.1% YoY while electricity and mining production led the way, up 13.6% YoY and 5.3% YoY respectively. For the foreseeable future, the latter two sectors are likely to be the strongest production-wise as energy crises create disruptions for manufacturers. We are also seeing some rebound in the automotive and electrical machinery manufacturing sectors, up 30.5% YoY and 14.8% YoY, as supply chain pressures there continue to ease. In the end, the slight improvement is a good sign for economic growth, but production is still below normal. The potential for COVID restrictions to reemerge is always a concern.

Chinese fixed asset investment was up 0.4% MoM and 5.8% YoY in August, slightly higher than 5.7% YoY in July. The pace of investment has slowed significantly in 2022 so despite attempts by the People’s Bank of China to inject liquidity into the system. In August, we see a slight improvement as the annual pace accelerates 0.1 ppts to 5.8%, but it’s nothing substantial. However, manufacturing investment is up a strong 10.0% YoY with strong growth in food (+17.0% YoY), chemical (+17.9% YoY), and general equipment (+16.9% YoY) manufacturing investment. Standing out from the rest, electrical machinery and equipment investment surged a strong 38.4% YoY in August which is likely a response to the crunch for semiconductors. As more capacity has been needed in that space, China has been looking to grow its market share of electrical equipment manufacturing, and the investment there reflects that.

New home sales prices in 1st tier cities edged up 0.1% MoM to 2.8% YoY in August, and existing home sales prices fell -0.3% MoM but were still up slightly at 0.8% YoY. New home sales prices in 2nd tier cities were weaker, down -0.2% MoM and -1.0% YoY with existing homes sales down -0.3% MoM and -2.8% YoY. The weakness in prices is a result of dramatically lower real estate activity. The total amount of sales of commercial housing in the period from January to August in 2022 was down -27.9% YoY. Real estate development investment is also trending lower, down -7.4% YoY in the same period, though this is a 1.0 ppts improvement from annual growth in the January to July 2022 period. The real estate sector continues to struggle in China and remains a huge drag on growth and consumer spending.

This is an excerpt from today's Econ Mornings newsletter.
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