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Fast Comment ChinaSigns of stimulus but growth slowdown continues

  1. Infrastructure investments rebounds while households are holding back
  2. Now more difficult to stimulate the economy
  3. Stimuli will mitigate but not avoid the growth slowdown
Infrastructure investments rebounds while households are holding back
The monthly activity indicators confirmed that growth is slowing across the board in China. Most importantly, retail sales growth slowed unexpectedly from 9.2 percent y-o-y in September to 8.6 percent in October. Thus, also households seems to be holding back amid trade war fears and deteriorating growth outlook. The weaker retail sales figures was already signalled by the weak car sales figures. Growth of industrial production did improve slightly from 5.8 to 5.9 percent y-o-y, but less than it fell the month before. Production is buoyed rather than dampened by the trade war, but only temporarily as exports to the US are moved forward before tariffs likely are raised from 10 to 25 percent at year-end. The only real positive surprise in the October data was fixed asset investments, which grew more than expected in year-to-date terms. Our calculations show that the ordinary annual growth rate in fact increased from 6.0 percent y-o-y to 8.0 percent, the third month of increase in a row from the lowest rate ever in July. The rebound is almost entirely driven by a policy-induced jump in investments in infrastructure. Fixed investments within industry and construction slowed.
Now more difficult to stimulate the economy
Stimuli have been announced in the form of, for instance, tax cuts, easier monetary and promotion of local government bond issuance to support infrastructure spending. These measures, along with further actions likely to be implemented ahead, should kick in more meaningfully somewhat into next year. It is, however, now not as easy as in earlier instances of slowing growth to stimulate the economy. China’s ‘classical way’ of stimulating is by boosting property and infrastructure investments. However the property market is this time already vibrant, with limited room for a further boost. The need for infrastructure, such as high-speed rails, highways, ports and airports, is also less pronounced than earlier with an increasing risk of investing in unprofitable projects. In general, a re-inflation of the credit bubble is not desirable, making it harder to stimulate the economy in the classical way. With this in mind, the announced tax cut can be seen as a more ‘modern’ way of stimulating, not least, household consumption.
Stimuli will mitigate but not avoid the growth slowdown
All in all, the stimuli will mitigate and smooth the growth slowdown but not avoid it. We stick to our below consensus view of official GDP growth slowing gradually from 6.5 percent this year to 5.7 percent in 2020.



Bjarke Roed-Frederiksen

Senior Economist

Latin America and China

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