Recent data releases from China continue to point towards a promising economic recovery, as most of the social distancing measures have been removed and “health codes” are being used to mitigate the risk of new outbreaks. Industrial production and investment are maintaining their recovery momentum as a result of accommodative policy measures. Domestic consumption has been lagging behind, but finally started to pick up and add to headline growth.
In August, infrastructure investment remained as the major growth contributor, with a 4.2% month-over-month growth. This was supported by the recent rise in bond issuance by provincial and local governments. According to the Ministry of Finance, a total of RMB 3.2trillion in special local government bonds were issued in the first eight months of the year, which were earmarked for key infrastructure projects. Meanwhile, property investment, driven by recovering property sales, increased by 4.6% year-over-year (y/y) over the January to August period. This also contributed to fixed asset investment and industrial production.
Industrial production was mainly driven by investment-related demand. Headline industrial production rose at its sharpest level (+5.6% y/y) since December 2019, led by high growth in sectors such as general industrial equipment (+10.9% y/y), electrical machineries (+15.1% y/y) and ferrous metals (+9.2% y/y). Strong growth was also recorded in automobile production (+14.8% y/y), thanks to strong momentum on both commercial and consumer demand.
China’s recovery has been led by investment and manufacturing, with personal consumption lagging behind. Yet, this is also starting to improve. Retail sales returned to positive growth for the first time this year (+0.5% y/y), mainly driven by car sales (+11.8% y/y). With the exception of automobiles, sectors vulnerable to the pandemic are also picking up gradually. For instance, catering sales fell by 7.0% y/y in August, compared to a 11.0% y/y decline in July. Overall, consumption data might have reflected the spill over of government-led investments in previous months, and the growth could be sustained when government spending gets back and remains on track.
Looking ahead, China’s economic growth should revert to its long-tem trend as recovery broadens in domestic demand. Despite uncertainties in the global economic environment, China’s export performance has surprised on the upside in recent months. Economic reopening in the global economy might also boost Chinese exports and further support growth.
On economic policies, China has been less aggressive than other major economies in the world, such as the U.S. and eurozone. Nonetheless, we continue to expect Beijing to stay on its pro-growth stance on fiscal policy. On monetary policy, the People’s Bank of China (PBoC) sees less of a need to flood the economy with liquidity in fear of triggering another round of borrowing or asset inflation. The policy differentiation between the PBoC and other major central banks has also caused continuous capital flow into China. As a result, the Chinese yuan remains on track for appreciation, and this in turn has strengthened global investors’ confidence in China. This cycle could last as long as Chinese economic growth continues to lead the rest of the world.
EXHIBIT 1: CHINA"S CONSUMPTION DATA
Source: CEIC, Bureau of Statistics of China, J.P. Morgan Asset Management. Data reflect most recently available as of 21/09/20.
Investment implications
We maintain our constructive view on Chinese equities and fixed income as we approach the end of a very challenging year. China’s domestic recovery is outperforming other major economies, and this will be contingent upon the ongoing discipline in keeping the pandemic under control. The U.S. elections on November 3 would also be important in determining how Beijing and Washington would interact with each other, even as both presidential candidates are expected to maintain a hawkish view on China.
China’s cyclical upswing should add to a broad range of structural growth factors that would favor companies in the new economy. The pandemic has accelerated technology adoption in finance, education, healthcare and other areas within the services sector. The upcoming party plenum in October will unveil the 14th Five Year Plan and this would provide more direction on the medium-term development of the Chinese economy. Active selection would be crucial to capture these structural benefits.
With the U.S. dollar expected to weaken in the medium term, the PBoC should have more flexibility in allowing the Chinese yuan to appreciate. While this may seem to undermine China’s export competitiveness, a stronger yuan would also imply cheaper imports of consumer goods, raw materials and manufacturing components. Moreover, Beijing is looking to attract more international capital into its financial markets, both in equities and fixed income. A modest appreciation would help to enhance the appeal of Chinese assets.
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