Although China’s retail sales and industrial output growth in October exceeded forecasts, the country’s overall economic picture showed notable areas of weakness, with the crisis-ridden real estate sector still threatening a full-blown recovery.

The second-biggest economy in the world has found it difficult to recover from the COVID-19 pandemic due to challenges posed by the property market, dangers associated with local government debt, poor global growth, and geopolitical concerns. Authorities are under pressure to implement additional stimulus since a flurry of policy support initiatives have only shown modest benefits.

Data from the National Bureau of Statistics (NBS) showed on Wednesday that China’s industrial output climbed 4.6% year over year in October, exceeding forecasts for a 4.4% gain in a Reuters poll. This represents an acceleration from the 4.5% pace reported in September. Additionally, it was the biggest gain since April.

After increasing by 5.5% in September, retail sales increased by 7.6% in October, with improvements in both restaurant and car sales growth. This was the quickest pace of growth since May. Due to the low base effect in 2022 when COVID curbs upset consumers and businesses, analysts had predicted that retail sales would expand by 7.0%.

Regarding the positive data surprise, analysts expressed caution, pointing out that the property industry continues to be a weak point in the economy and that there are still significant reforms that need to be implemented before there can be a long-term, sustainable recovery in growth.

“Due to the impact of holidays and low base effect in 2022, year-on-year figures cannot reflect the actual momentum of the economy,” said Xing Zhaopeng, senior China strategist at ANZ.

He claimed that month-over-month data indicates “increasing deflationary risks” and a further weakening of economic momentum.

Oxford Economics’ China economist Louise Loo said that even while the external demand rebounded last month as destocking pressures subsided, sustained weakening in the market might still hurt industrial production.

Earlier in October, during the eight-day Golden Week holiday, consumption did not advance much either. Travel during that time period fell short of the official expectation, according to experts, as consumers worry about their jobs and future income growth in an unstable labour market.

According to NBS data, the 5.0% national survey-based unemployment rate remained constant from September to October. June saw a record high of 21.3% for youth unemployment, but data wasn’t accessible because the statistics agency had stopped releasing it in July.

Though the benefits have only been slight thus far, China has been stepping up its efforts to revitalise its post-COVID economy in recent months with a plethora of policy assistance measures.

Wednesday’s positive news coincides with a plethora of other October indicators that have been made public in recent weeks that suggest a muted momentum for growth. Unexpected growth in imports was accompanied by a faster decline in exports, sluggish household borrowing, falling consumer prices, and continued manufacturing deflation.

The challenge ahead of the authorities is difficult since any strong monetary support would erode the already fragile yuan and deepen the interest rate gap between China and the West, particularly the United States.

Beijing is concerned about a return to the big-bang fiscal stimulus of the past, which resulted in enormous debt and hampered the economy, as that could exacerbate capital outflows.

Although a full-blown recovery is still some way off, the economy grew faster in the third quarter than most analysts had predicted. The government had targeted 5% annual growth for the economy.

After a shockingly low data on U.S. inflation overnight increased speculation that the Federal Reserve was nearing the conclusion of its tightening cycle, the yuan held close to a two-month high.

On Wednesday, the People’s Bank of China (PBOC), the nation’s central bank, rolled over maturing medium-term policy loans while increasing liquidity injections and maintaining interest rates.

The government also increased its projected 2023 budget deficit from 3% of GDP to roughly 3.8% last month in an unusual move to accommodate for the upcoming issue of 1 trillion yuan ($137.10 billion) in sovereign bonds.

In an effort to boost the economy, the PBOC has lowered banks’ reserve requirement ratios (RRR) twice already this year. In the latter several months of this year, analysts generally anticipate another RRR cut and a reduction in interest rates.

China’s property market, which has been severely damaged by the crisis, has not yet shown signs of recovery, even in spite of increased efforts to assist homebuyers through programmes, reduced borrowing costs, and loosened limitations on home purchases.

Following a similarly steep 9.1% decline in January–September, real estate investment plummeted 9.3% from January to October of last year.

With a 2.9% year-over-year growth in the first ten months, fixed asset investment fell short of forecasts for a 3.1% increase. It increased by 3.1% between January and September.

Private company confidence was similarly low, as evidenced by the 0.5% fall in investment in the sector from January to October—a minor improvement over the 0.6% decline in the first nine months.

“Overall, the data published today suggest that the recovery was struggling to gain a strong footing at the start of Q4, but it was not nearly as weak as some had feared,” said Sheana Yue, China economist at Capital Economics.

“Policy looks set to remain supportive, and possibly even stepped up to prevent the economy from backsliding.”

(Adapted from CNBC.com)

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