China Weekly Letter: Economy weakens, Hong Kong protests reach new peak

Industrial growth lowest since 1990, more stimulus coming

Chinese data this week was soft but not a disaster. On the surface industrial production looked very weak falling to 4.8% y/y, the lowest rate since 1990. However, it still points to GDP growth around 6.2% y/y, which is within the government's 6-6½% target range for 2019 (see chart). Retail sales growth dropped to 7.6% y/y in July from 9.8% in June. Again, not looking great on the surface. Taking a step back, though, the June level was an outlier and too good to be true. The smoothed series has moved sideways since late 2018 around 8.5% y/y. One of our favourite real time indicators, metal price inflation, indicates an only moderate decline in PMI's from here (chart on page 2).

On Friday, China's state planner said that it would roll out a plan to boost disposable income this year and in 2020 to spur private consumption.

Comment: China's economy is under pressure from the trade war but so far there are still no signs of a hard landing. Growth is still on track to reach the government's target. However, in order to keep growth within the range China looks set to add more stimulus to consumers. This also fits with the long-term goal of consumption being a bigger growth driver and relying less on external demand.

Hong Kong protests reached a new peak

Protests in Hong Kong reached a new peak this week with violent clashes in Hong Kong airport. A Hong Kong policeman ended up drawing his gun after being caught in a corner with angry protesters around him. A Chinese man who turned out to be a journalist from the Chinese tabloid Global Times, was beaten and detained by protesters.

The violence led to a sharp response in China that has increasingly compared the violence to terror-like actions. All eyes have been on the thousands of troops from China's paramilitary People's Army Police that have moved to Shenzhen, only 30 kilometres from Hong Kong's city centre. The crisis has now become the most discussed subject on Chinese social media. Therecent violence has led to a bit of a backlash for protesters as more Hong Kong citizens have voiced opposition to the violence. 91-year old Hong Kong tycoon Li Ka-shing used newspaper ads to reject violence and suggested that further escalation could ruin Hong Kong forever.

While the protests started with demonstrations against an extradition bill, they have become more general demands for more democratic freedoms and against police violence. Protesters also want a complete withdrawal of the extradition bill, which has so far been suspended, but not completely withdrawn

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