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COVID restrictions hurting Chinese retail, building on existing imbalances in the economy

COVID restrictions hit retail in August, building on existing imbalances in China’s economy. The impact of COVID-19 restrictions (that were implemented in the second half of July) were evident in a range of indicators in August – particularly retail sales, where growth plunged on apparent caution from consumers. This further exacerbates the existing imbalance between production and consumption in China’s domestic economy. The length of the outbreak, and duration of restrictions, remains uncertain, with accelerating case numbers in Fujian province in the past week presenting some downside risk to our outlook. Last month, we revised down our forecast for 2021 to 8.7%, followed by growth of 5.9% in 2022 and 5.7% in 2023.

Real retail sales growth plunged to 0.9% yoy (from 6.5% yoy in July). While there has been a downward trend for several months – reflecting diminishing base effects – this downturn reflected the impact of COVID-19 restrictions.

In contrast, the slowdown in industrial production was relatively modest – down to 5.3% yoy (from 6.4% yoy in July).

Continued strong growth in producer prices – which flows through into the cost of investment goods – meant that real investment fell again in August – down by 6.8% yoy (compared with a 7.8% yoy decrease previously). Nominal investment in infrastructure has contracted in recent months, which may be related to falls in government bond issuance in the first eight months of 2021.

China’s trade surplus widened in August – continuing a trend evident since April 2021 – totalling US$58.3 billion (compared with US$56.6 billion in July). The value of both exports and imports rose strongly month-on-month, with the increase in exports slightly larger – with higher prices contributing to this trend.

In the first eight months of 2021, new credit issuance totalled RMB 21.8 billion, a decrease of 16.8% yoy. A sharp decline in non-bank lending has been the main driver of this trend, with bank loans increasing by around 1.3% yoy to RMB 15.3 trillion.

Recent statements by officials from the People’s Bank of China (PBoC) have dampened expectations of additional monetary easing – following the surprise cut to the Required Reserve Ratio and COVID-19 outbreak in July. At a news conference in early September, the head of the bank’s monetary policy department noted that there was no shortfall in base money and that demand and supply of liquidity would likely be balanced in coming months.

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