Economy Watch | China

Economy Weakens in November; Small Batches of Stimulus Likely Down the Road

December 21, 2023

Trusted Insights for What's Ahead™

• Status of China’s Economy – November data remained weak, both on the supply and demand sides. This is in line with our view that the stronger-than-expected growth in Q3 was driven by a short-lived release of pent-up demand, and thus not indicative of a broader recovery in confidence levels and economic activity. Although government support has picked up speed, this has so far not been enough to generate a turnaround. 
• Investment Trends – Growth in fixed asset investment (FAI) remained stable in November, unchanged at 2.9% y-o-y in Jan-Nov. Though most of the local government bond quota for this year has been used, extra stimulus via the RMB 1.5 trillion local government debt swap program and RMB 1 trillion special government bond issuance is supporting infrastructure and manufacturing investment growth. Despite this, it looks like sluggish demand is starting to affect manufacturing investment growth. Real estate investment growth will also continue to be a major drag.
• Consumption Trends – Retail sales continued to accelerate in November, growing 10.1% y-o-y from 7.6% in October. However, similar to last month, this was on the back of a very low base in November 2022, when y-o-y growth dropped to -5.9%. Despite favorable monthly headline figures, the growth momentum in consumption is actually moderating. Looking ahead, December headline growth will continue to look deceptively strong thanks to last year’s low base, but this effect will fade in 2024.  
• Trade Trends – Export growth improved significantly in November, increasing 0.5% y-o-y, up from -6.4% in October. However, this monthly improvement was driven by last year’s low base. The manufacturing PMI’s new export orders sub-index remained below the 50-mark in November, further pointing to weak expectations for export growth going forward. Against the backdrop of the global economic slowdown and heightened geopolitical risk, we expect external demand for China-made products to continue moderating in the next few months.  
• Implications for Business – China’s ongoing economic woes are underpinned by deep-rooted structural imbalances that will take time to address, and which the Chinese Government is clearly not interested in exacerbating, as emphasized last week at the Central Economic Work Conference. Stimulus will remain targeted and moderated. We currently assume an operating environment defined by weak aggregate demand due to the property downturn, softer private consumption, and downgraded spending, moderating external demand, and a pro-austerity policy stance.