INSIGHT: China’s industrial activity gathers pace but lopsided April data clouds outlook

SINGAPORE (ICIS)–China’s industrial output grew by 6.7% year on year in April, signalling a further strengthening of its manufacturing sector, but weaker retail sales and bleak property data suggest that its overall growth momentum remains weak.

The April industrial output reading accelerated from the 4.5% expansion in the previous month, data from the National Bureau of Statistics (NBS) showed.

The strong April data brought year-to-date growth to 6.3% year on year, and industrial activity looks like it will be one of the main growth drivers in the second quarter of the year.

The transition toward high-tech manufacturing continues to be one of the major driving forces for China’s industrial output.

High-tech manufacturing grew 11.3% year on year in April, and 8.4% over the first four months of the year, while auto production also rebounded strongly, up to 16.3% in April up from 9.4% in March.

The upbeat manufacturing outlook follows earlier April data which showed the country’s exports and imports both returning to growth in April after contracting in the previous month, while the official April manufacturing purchasing manager’s index (PMI) remained in expansionary territory at 50.4 in April from 50.8 in March.

Despite a partial retreat after peaking during the pandemic, China’s share of global goods exports has recently rebounded, reaching 14.7% in the second half of 2023, up from 14% in the first half and exceeding pre-pandemic levels of 13.3% in 2019, according to Christine Peltier, an economist at French bank BNP Paribas.

In addition, China’s recent market share gains have been recorded across a wide range of products, including low value-added consumer goods such as furniture and toys, organic chemicals and plastics, vehicles, electrical and electronic machinery and equipment and parts thereof, she noted.

They have been particularly impressive for electric vehicles, with export volumes multiplied by 7 between 2019 and 2023, solar panels, exports multiplied by 5 between 2018 and 2023, and lithium batteries.

These three products accounted for around 4% of China’s total exports in 2023, about three times their 2019 share.

The flood of Chinese products has given rise to growing concerns among industrial entrepreneurs and governments in the US, the EU and now emerging countries, and is likely to lead to new trade confrontations in the coming months, Peltier added.

RISKS STILL OUTWEIGHING POSITIVES
“While we acknowledge the resilience in some parts of the [China] economy amid this economic rebalancing, we believe these are insufficient to outweigh the drags from the property woes and geopolitical headwinds,” Nomura Global Markets Research said in its Global Economic Outlook Monthly report.

“Export growth is holding up steadily for now, thanks to cheap prices and resilient external demand, but could face further headwinds as countries launch anti-dumping investigations,” it said.

Although China’s export growth has been strong this year due to the global tech upswing, resilient external demand, and competitive prices, rising trade tensions may hinder the export sector and prompt more supply chain relocations away from China in the long term.

US President Joe Biden is increasing tariffs on $18 billion worth of imports from China, including electric vehicles (EVs), semiconductors, batteries, and other goods. The White House stated that this decision is a response to unfair trade practices and aims to protect US jobs.

In response, China’s Ministry of Commerce announced that it “will take resolute measures to safeguard its own rights and interests.”

PRIVATE CONSUMPTION REMAINS WEAK
April’s data revealed that retail sales growth fell to a new post-pandemic low, further indicating a shift away from consumption as a primary growth driver for 2024.

Retail sales growth fell to 2.3% year on year in April, slowing from the 3.1% expansion in March, bringing the year-to-date growth rate to 4.1%.

The largest drag to retail sales in April was tied to automotive sales, which declined by 5.6% year on year, and the data may add fuel to the fire for the critics of China’s overcapacity in this sector.

Another major category, household appliances, also slowed to 4.5% year on year. As trade-in policies take effect later in the year, these categories could see some recovery, Dutch banking and financial information services firm ING said in a note.

“Consumption growth is likely to remain moderate through most of 2024, as consumer confidence remains downbeat amid tepid wage growth and the lingering negative wealth effects from the past several years of declining asset prices,” it said.

“A possible bottoming out of prices would also take some time before translating to stronger consumer activity.”

HOUSING SECTOR CONTINUES TO SLUMP
The persistent weakness in China’s property sector, accounting for roughly a quarter of its economy, continues to weigh on overall economic growth.

April data showed that in the 70-city sample from the NBS, property prices continued to slide.

New home prices fell by 0.58% month on month in April, and secondary market prices fell by 0.94%, which were the steepest sequential declines since the start of the housing slump in 2021.

At the city level, 69 out of 70 cities continued to see declining prices in the secondary home market in April, unchanged from March.

Although new home prices rose in 6 out of 70 cities, including Shanghai and Tianjin, the new home market’s performance was weaker in April compared to March when 11 out of 70 cities saw price increases.

Separately, property investment fell by 9.8% year on year in January-April, extending the 9.5% contraction in January-March, NBS data showed on Friday.

China is now exploring a bold plan to revive its struggling property market by having local governments purchase millions of unsold homes.

Chinese authorities on 17 May pledged new support to enable state-owned enterprises to purchase unsold apartments, aiming to provide developers with more funding to complete pre-sold properties.

The People’s Bank of China also on 17 May eliminated the minimum mortgage interest rate and reduced the minimum down payment ratio for both first-time and second-time home buyers.

“A recent flurry of supportive policy announcements including removing purchase restrictions, housing “trade-in” policies, and plans to directly purchase housing units for social housing programmes, has boosted market optimism that we will see a bottoming out of housing prices sometime this year,” ING said.

As these policies roll out in the coming months and help alleviate downward pressure on property prices, data indicates that homebuyers may still remain cautious and on the sidelines until a trough is established, it said.

“While it is arguably one of the most important signs of a stabilization of sentiment in China, it is worth noting that a potential bottoming out of housing prices would only be the first step; elevated housing inventories will likely keep real estate investment suppressed for some time yet, and the property sector will remain a major drag on the economy this year,” ING added.

Recent announcements from local governments, including the Dali government of Yunnan Province, have expressed intentions to facilitate the acquisition of existing homes for conversion into public housing, Singapore’s OCBC Bank said in a note.

This move is seen as a way to not only address the housing surplus but also potentially stimulate economic growth by increasing public spending and boosting the construction sector.

Moreover, China’s Finance Ministry announced on 13 May a plan to issue 1 trillion yuan of ultra-long special bonds over a period of six months, ending in November.

This moderate issuance pace marks only the fourth time in 26 years that China has employed this type of debt for fiscal stimulus, allowing for targeted spending.

China has set an ambitious economic growth target of around 5% this year, a level which analysts are cautiously optimistic about. The world’s second-largest economy expanded by 5.3% in the first quarter of this year.

Thumbnail photo: A man rides a scooter next to a construction site of residential buildings in China (Source: ANDRES MARTINEZ CASARES/EPA-EFE/Shutterstock)

Insight by Nurluqman Suratman