China's industrial engine gathers speed, consumers open wallets in boost to recovery

BEIJING (Reuters) - China’s industrial output accelerated the most in eight months in August, while retail sales grew for the first time this year, suggesting the economic recovery is gathering pace as demand starts to improve more broadly from the coronavirus crisis.

FILE PHOTO: An employee works at a production line manufacturing optical fiber cables at a factory of the Zhejiang Headway Communication Equipment Co in Huzhou, Zhejiang province, China May 15, 2019. REUTERS/Stringer

An annual decline in fixed-asset investment over January-August also moderated thanks to expanded stimulus from Beijing, but authorities remain wary about the outlook given heightened external risks, including from intensifying Sino-U.S. tensions.

After the pandemic paralysed the economy, China’s recovery has been gaining momentum as pent-up demand, government stimulus and surprisingly resilient exports propel a rebound. Floods across southwestern China that disrupted production in July have receded.

“Strong external demand, a further recovery from the pandemic and pent-up demand from the floods all contributed to the robust activity data in August,” Ting Lu, chief China economist at Nomura, said in a note to clients.

“We expect a further, albeit gradual, recovery of the services sector, a steady improvement in retail sales and elevated fixed-asset investment growth.”

Industrial output growth quickened to 5.6% in August from a year earlier, the fastest in eight months, data from the National Statistics Bureau showed on Tuesday. Analysts polled by Reuters had expected a 5.1% rise from 4.8% in July.

Retail sales also beat analysts’ forecast with a 0.5% rise on-year, snapping a seven-month downturn and bettering expectations for zero growth. In July, sales dropped 1.1%, but consumer confidence has been picking up lately, from spending on automobiles and duty-free shopping.

Auto sales rose 11.8% in August year-on-year while sales of telecoms products jumped 25.1%, the data showed.

The decline in fixed-asset investment slowed, falling 0.3% in January-August from the year-ago period, compared with a forecast 0.4% slide and a larger 1.6% decline in the first seven months of the year.

Private sector fixed-asset investment, which accounts for 60% of total investment, fell a less steep 2.8% in January-August, compared with a 5.7% decline in the first seven months. Property investment, a crucial growth driver, also jumped the most in 16 months in August.

In commodities, China posted record output in both crude steel and aluminium last month thanks to robust demand from the construction sector and recovery in automobile sales.

“We think that China’s economic recovery is on a reasonably firm footing now and should continue through Q4 and into 2021, with solid investment growth, gradually recovering consumption momentum and resilient exports,” said Louis Kuijs at Oxford Economics.

Chinese stocks .SSEC led Asian markets higher, while the yuan CNY=CFXS currency rose to 16-month highs on the upbeat data. [MKTS/GLOB]


Recent economic indicators ranging from trade to producer prices and factory activity all suggested a further pick up in the industrial sector, and the broader economy.

Government stimulus has been a powerful domestic driver, while momentum has also been supported by Beijing’s largely successful efforts to get the virus under control.

“Fiscal and monetary policy stimulus should continue to support the recovery. But we expect the impact of policy stimulus to lose some punch with credit growth easing in Q4,” Oxford Economics’ Kuijs said.

Data last week showed China’s August exports marking the strongest annual gain since March 2019, as more of its trading partners eased coronavirus lockdowns.

Lu at Nomura has raised forecasts on China’s third-quarter economic growth to 5.2%, versus the actual 3.2% pace in April-June, and expects fourth-quarter growth to pick up further to 5.7%.

Analysts at ANZ, meanwhile, have raised their 2020 China growth forecast to 2.1%, but the projected full-year rate would still be the weakest pace since 1976.

Some analysts fear that the recovery could stall, hurt by rising tensions between Washington and Beijing, which many expect could escalate ahead of the U.S. presidential election in November.

Moreover, the possibility of another wave of local infections in the winter, and the continued rise in COVID-19 cases across a number of countries, led by India and the United States, have many investors nervous about the outlook.

Those worries were partially underscored by statistical bureau spokesman Fu Linghui, who told reporters that the economic recovery remains unbalanced.

“Externally, there are still many unstable and uncertain factors. On the domestic side... some industries and enterprises are still facing difficulties, and the recovery is unbalanced,” Fu said.

Additional reporting by Colin Qian; Editing by Shri Navaratnam