Pressure In Activity Data Signals More Policy Support

November’s activity data showed the economy being stuck in low gear. The production side grew 3.8% yoy with pressure subsiding, while weakness on the demand side remained prevalent as retail sales and FAI growth softened to 3.9% yoy and 5.2% yoy in 11M21 respectively. With the PBOC signalling a dovish turn, we expect more proactive macroeconomic policies next year to cushion the broad-based economic weaknesses.


Factory output quickens. Industrial output extended its recovery to 3.8% yoy in Nov 21, 0.3ppt higher than the previous month, beating consensus’ estimates of a 3.7% yoy growth. In terms of sector breakdown, the value added by mining and manufacturing grew 6.2% yoy and 2.9% yoy respectively (Oct 21: 6% yoy/2.5% yoy), while the supply of electricity, gas & water rose 11.1% yoy, unchanged from the previous month. The pace of auto sales slowdowns also moderated to -4.7% yoy (Oct 21: -7.9% yoy), suggesting the continuous easing of chip shortages.

Retail sales weaken on COVID-19 restrictions. Retail sales slowed to 3.9% yoy, missing consensus’ forecast of a 4.7% yoy gain. Growth in commodity retail fell 7.9% mom amid strong sales around the “Single Day” shopping festival. Restaurant and catering sales also plunged further to -2.7% yoy in Nov 21, dragged by multiple scattered local COVID-19 outbreaks. While COVID-19 restrictions may have been the prime reason for the subdued consumption, the weakness is a cause for concern given that it overcame a boost from inflationary pickups.

FAI growth continues to stall. Fixed asset investment (FAI) growth eased to 5.2% in 11M21, below consensus’ projection for a 5.4% yoy growth on the back of stringent financing rules and weak home sales. On a more positive note, the slowdown in railway infrastructure continued to moderate to -1.7% yoy ytd (Oct 21: -3.2% yoy ytd) as credit growth picks up. With local governments ramping up efforts to fund new projects and Beijing to begin selling next year’s bonds from 1 Jan 22, we expect FAI growth to speed up significantly in the coming months.

Delicate balancing act. Amid authorities’ pro-growth pivots, achieving “common prosperity” remains a long-term aspiration guiding many aspects of economic policies. China is unlikely to abandon policies aimed at tackling structural problems from pursuing energy transition to deflating the housing bubble. The extent of the slowdown will hinge on what balance it strikes between supporting short-term growth and advancing long-term reforms. That said, the 2021 Economic Work Conference pointed to a much more balanced approach to short-term and long-term goals. Thus, we expect macroeconomic easing to be front-loaded early in 2022 with another cut in the reverse requirement ratio (RRR).