Chinese Economy Makes Strong Start to Q4 as Industrial Growth Rebounds to Pre-Crisis Levels

Industrial Sector Rides on Momentum in Heavy Industry

Growth in China's industrial sector gained more traction in October, bolstered by a strong recovery in heavy industrial sectors such as steel and automotive, as well as a favourable base effect. Added value of above-scale industrial firms—namely, all state-owned firms and larger non-state-owned companies—soared 16.1% year-on-year (y/y) in October, accelerating from 13.9% y/y growth posted in September and a single-digit 8.2% y/y growth recorded in the same month of last year, when the downturn started. Driving the industrial growth was the heavy industrial sector, which expanded 18.1% y/y in October, as key heavy industrial sectors such as transport equipment and ferrous metals registered strong growth at 28.9% y/y and 25.1% y/y respectively. The crude steel and automotive sectors saw the biggest jump in output volume, by 42.4% y/y and 78.6% y/y respectively in October, largely due to a big base effect, as crude steel output plunged 17% y/y in October last year—the biggest drop on record—while automotive output contracted 0.7% y/y in the same month last year. Recovery of the light industrial sector remains soft, reflecting weak exports. Textiles expanded only 11.1% y/y in October, while electrical appliances rose 12.7% y/y and communications/computers and other electronics equipment gained only 7.2% y/y.

Investment Continues to Drive Growth, Exports Rebound

Urban fixed-asset investment (FAI) in China soared 33.1% y/y in the first ten months, which marked an acceleration of 5.9 percentage points from the same period of last year, although a marginal deceleration of 0.2 percentage point from the first three quarters. Real estate investment, which accounted for about 19% of total urban FAI, picked up more momentum in October, registering growth at 18.9% y/y for the first ten months—accelerating from a 17.7% y/y increase for the first nine months. This, combined with stimulus spending in social welfare programmes, as well as transport systems, pushed the country's investment in the services sector up by 37.8% y/y in the first ten months.

Retail sales, a close proxy of private consumer spending, continue to expand at a rather buoyant pace, at 16.2% y/y in October—a record high for this year—accelerating from a 15.5% y/y rise in July, bolstered by strong auto- and home-appliance sales as well as more positive price effects, as deflation has eased. Auto sales soared 43.6% y/y in October and home appliances 35.4% y/y, with their cumulative sales in the first ten months coming in at 26.5% y/y and 10% y/y respectively. The exports sector was still weak, although on track in terms of making a recovery. The country's total exports in October declined 13.8% y/y, the smallest drop of this year, while imports fell 6.4% y/y, on the back of a significant upturn in the foreign-trade sector in September. In cumulative terms, China's exports dropped 20.5% y/y in the first ten months, with imports down by 19% y/y.

Deflation Continues to Ease, While Money Supply Stays Loose

Deflationary pressures continued to ease in October, after hitting a turning point in August. The consumer price index (CPI) edged down 0.5% y/y in October, the smallest decline of this year, as the food component of the CPI rose 1.6% y/y—the third straight monthly rise of this year. A marked narrowing in decline of the producer price index (PPI) was also reported in October, as the PPI fell 5.8% y/y, the smallest fall in eight months.

Money supply remains loose, as M2 expanded 29.4% y/y at the end of October, a record high in recent years, fuelling record growth in bank lending, at 34.5% y/y so far this year. New renminbi lending made in October, however, atrophied to 253 billion yuan (US$37 billion), about half the level of loans given out in September, and the lowest of this year, due to expiration of commercial bills issued in the first half as well as tighter oversight on bank lending.

Outlook and Implications

The latest set of monthly data shows that China's economic recovery is well on track, with momentum increasing in October after two strong quarters. With fewer headwinds in the exports sector, tailwinds in the form of stimulus-driven capital spending, as well as a big base effect in the final months of this year, the Chinese economy is expected to see an even stronger final quarter, which will help push growth above the government target of 8%. The country's GDP growth had already accelerated to 7.7% y/y in the first three quarters, from 6.1% y/y in the first.