China: industrial production remains weak but domestic demand stabilising

Growth in industrial production was weaker than expected in November where it eased to 7.2% y/y (consensus 7.5%, DBM 7.4%) from 7.7% in October. According to our calculations seasonally adjusted industrial production increased 0.4% m/m in November after increasing 0.5% in October. This is usually consistent with a manufacturing PMI below 50 (see chart below). Hence, the hard industrial production data at the moment paint a weaker picture of the Chinese economy than the manufacturing PMIs (see chart below).

Fixed asset investment (FAI) in November eased to 15.8% year-to-date, y/y (consensus 15.8%, DBM 15.7%) from 15.9% in October. According to our calculations the growth in FAI improved slightly to 13.4% y/y in November from 13.3% in October. Seasonally adjusted FAI in November increased 0.9% m/m after increasing 1.4% in October and increasing only 0.1% and 0.2% in September and August respectively. Hence, domestic investment demand appears to have stabilised in recent months after substantial weakness in August and September (see chart below).

On a positive note, retail sales in November accelerated slightly to 11.7% y/y (consensus 11.5%, DBM 11.5%) from 11.5% in October. The acceleration in retail sales was even stronger in real terms as CPI inflation (released Wednesday) in November declined to 1.4% y/y from 1.6% on the back of particularly lower gasoline prices. Hence, retail sales suggest that private consumption is relatively resilient at the moment.

While the November data suggest continued downward pressure on economic activity, they also suggest that the source of the weakness has shifted to exports from previously mainly domestic investment demand. We still expect GDP growth to ease to 7.2% y/y in Q4 from 7.3% in Q3, albeit the development in industrial production suggests downside risk to our forecast. The weak industrial production in November and the current gap between the manufacturing PMIs and the hard industrial production data also suggest that the manufacturing PMI could decline in December but we still expect the manufacturing PMIs to improve in Q1 15.

Policy-wise we expect People’s Bank of China to cut the reserve requirement twice by 50bp in the coming months with the first cut as soon as later this month. We still expect GDP growth to pick up moderately in Q1 and Q2 next year on the back of monetary easing and some improvement in global growth.