After a disappointing second quarter, the world's second-largest economy lost further momentum in July, with new home prices falling at the fastest pace in nine years, industrial output slowing, export and investment growth declining and unemployment rising.
Another round of poor Chinese economic figures is increasing pressure on Beijing to loosen the fiscal spigot even further and even hand out shopping vouchers to bring growth, fueled by domestic consumption, back to this year's target of around 5%.
After a disappointing second quarter, the world's second-largest economy lost further momentum in July, with new home prices falling at the fastest pace in nine years, industrial output slowing, export and investment growth declining and unemployment rising.
Other data beat forecasts, but not for positive reasons: rising inflation was blamed on bad weather rather than stronger domestic demand, a jump in imports reflected advance chip purchases ahead of expected U.S. tech restrictions, and a rebound in retail sales was helped by low comps in 2023.
While all this is going on, Pan Gongsheng, governor and Party chief of the People's Bank of China (PBOC), in an exclusive interview with state news agency Xinhua, came out to calm the waters, emphasizing that the country "will act more quickly to improve its central banking system and promote high-quality financial development."
"China will focus on improving the dual-pillar regulatory framework of monetary policy and macroprudential policy to maintain the stability of both the value of the currency and the national financial system," Pan said.
To achieve this, "China will gradually move away from a focus on quantitative targets, put greater emphasis on the use of price-based instruments such as interest rates, and enrich its monetary policy toolkit," the official said.
Efforts will be made to boost policy communication, strengthen policy transparency, improve the mechanism for preventing and defusing systemic risks, strengthen the financial market and its infrastructure, and build an open financial system with higher standards, he said.
WEAK ECONOMIC ACTIVITY
The bottom line is that economic activity in China remained more than subdued in July, showing continued weakness, particularly in metal-intensive segments such as infrastructure and property.
However, industrial metals markets reacted with gains, as if things could only improve in China, the Swiss bank notes with concern.
"We doubt this, especially as the government shows no signs of implementing broad-based stimulus measures. Iron ore remains our least preferred metal, although prices may be ripe for a short-term rebound after the recent decline," said Carsten Menke, Head of Next Generation Research, Julius Baer in an analysis released this morning.
While retail sales growth rebounded from very low levels in June, growth in industrial production and fixed-asset investment moderated more than expected.
"The slowdown in the real estate sector remains a major headwind and the uncertain economic outlook is weighing on consumption and investment. We see further downside risks to our 4.7% growth forecast for 2024," adds Sophie Altermatt, Economist at Julius Baer .
While the slowdown in industrial production was in line with expectations following weaker manufacturing PMI readings and slowing exports, fixed asset investment growth was significantly weaker. An acceleration in the decline in real estate investment, as well as slowing manufacturing and infrastructure investment, contributed to the sharper-than-expected slowdown.
Retail sales growth, however, rebounded from the very low pace of June, driven by consumer goods, while consumption of food services slowed.
Activity in the housing sector remained weak and in deep contraction, with new home investment and sales declining further, while the decline in housing starts and completions slowed from a low base. Prices of new and existing homes continued to fall, although the monthly pace of decline was somewhat slower than in June. The ongoing slowdown in the real estate sector remains a major headwind for the Chinese economy.
"Overall, the latest batch of economic data confirms that the Chinese economy is not out of the woods, with uncertainty over the economic outlook weighing on consumption and investment. As economic momentum remains subdued and deflationary pressures persist, we see further downside risks to our 4.7% growth forecast for 2024," Altermatt emphasises.
WHAT WILL HAPPEN TO METALS?
Overall the problem is that China shows continued weakness, particularly in metal-intensive segments such as infrastructure and property.
"Infrastructure investment growth slowed to a halt in July, supporting our assessment that China is refraining from broad-based stimulus measures, instead opting for targeted measures," it said.
Industrial metals, however, reacted with gains on Wednesday, as if traders thought things could only get better in China.
Shanghai-traded aluminum, copper and iron ore prices rose 1.3%, 2.4% and 4% on the day, with only construction steel prices trading lower. The most actively traded contract is now down nearly 20% since mid-May, indicating a glut of construction steel in China amid a weak property market.
As a result, steelmakers' margins have come under pressure, prompting them to cut output by about 9% in July compared with a year earlier.
However, Chinese steel exports remain at elevated levels as international markets are serving as an important outlet amid weak domestic demand.
Falling steel prices in China have also put pressure on iron ore, which fell below $100 a tonne on international markets earlier this week.
There is a multiplier effect from steel to iron ore, as to produce one tonne of the former approximately 1.6 tonnes of the latter are needed, depending on the grade of the ore.
"So things can only get better in China? We doubt it. While activity levels are indeed very low, particularly in the real estate market, the government does not seem to show any intention of countering this with massive stimulus measures," adds Menke.
And all the measures taken so far have been very targeted or simply too small to make a big difference in the industrial metals markets. With this in mind, and also considering that there are sufficient supplies worldwide, iron ore remains the least preferred metal by this analyst.
"We reiterate our cautious view, also acknowledging that after the recent decline, prices may be ripe for a short-term rebound. However, such a rebound should not be mistaken for the beginning of a more lasting recovery," stresses Julius Baer's head of next-generation research.
GOVERNMENT INTERVENTION
"Current economic performance remains below target, requiring immediate and significant policy intervention," said Carlos Casanova, senior Asia economist at UBP. This could require the government to widen the budget deficit to 4% of gross domestic product (GDP) from the planned 3%, he was quoted as saying by Reuters .
There are even those who are betting that Beijing could decide in October to bring forward part of next year's bond issuance quota, if growth shows no signs of bottoming out this summer.
Everything to achieve the desired 5% growth.
China took similar steps last October, when it widened the deficit to 3.8% of GDP from 3.0% and separately earmarked part of 2024 local government debt repayments in advance to invest in flood prevention and other infrastructure.
Therein lies the crux of China's problem, as infrastructure spending is yielding diminishing returns after decades of investment in bridges, roads and railways.
Meanwhile, China's preferred growth engine, advanced manufacturing, is fuelling trade tensions and concerns about industrial overcapacity and factory deflation.
"The Chinese economy, given its size, cannot be powered by manufacturing and exports alone," Société Générale analysts wrote in a note on the latest Chinese data. "To achieve the 5% growth target - if that remains the goal - policymakers need to step up support for domestic demand," they concluded.
