China: Weaker external demand adds to domestic challenges
|Outlook
We keep our forecast for 2022 at 2.7% (below consensus at 3.5%) and 5.7% for 2023 (above consensus at 5.2%). The economy continues to struggle with three strong headwinds: a) zero-covid policy, b) property crisis and c) fading global demand. Chinese stimulus continues to increase and is proves a floor under growth. But it cannot kickstart the economy as long as the cloud of uncertainty over covid remains and the property crisis continues. Exports are now also likely to struggle as the US and euro area are expected to enter recession. We look for a recovery in 2023 on easing covid policy and a gradual lift to housing.
China today
Growth. PMIs dropped back in August, but the credit impulse is still robust. Retail sales surprised to the upside in August but remain weak. Confidence is low. The property sector is still in a deep crisis although stress among developers has eased somewhat lately.
Inflation. PPI inflation declined further to 3.5% in August coming from 13.5% in October. CPI inflation declined to 2.5% in August from 2.7% in July, still below the 3% target.
Monetary policy. PBoC has kept the RRR rate unchanged since April but has cut interest rates on 22 August by 10bp, mortgage rate by 15bp . M1 growth has picked up.
CNY. The yuan seeing another leg of weakness against USD. Pressure still up in USD/CNY.
Stock markets. Stocks lower on growth concerns, US tech restrictions and global recession fears. The China USD offshore high yield rate has come down lately but is still above 20%.
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