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Manufacturing ramps up in China, while the consumer downturn continues

May 17, Beijing (Reuters) – While retail sales unexpectedly declined and the real estate sector continued to be a drag on the economy, China’s factory output exceeded predictions in April, aided by rising external demand. This increased pressure on Beijing to boost growth.

Friday’s mixed news came after other April indications that pointed to a patchy recovery in the second-largest economy in the world, with trade and consumer prices rising but credit growth hampered by low consumer confidence.

According to National Bureau of Statistics (NBS) figures, industrial output increased 6.7% year over year in April. This was higher than the 5.5% increase predicted in a Reuters poll of analysts and faster than the 4.5% growth rate recorded in March.

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Nonetheless, retail sales increased by just 2.3%, the worst gain since December 2022, falling well short of the projected 3.8% growth and below the 3.1% increase in March.

“Strong external demand and weak domestic demand continue to be the pattern of the data. The decline in real estate is undoubtedly the cause of the weakening in domestic demand, according to Xing Zhaopeng, senior China strategist for ANZ.

“Current rebalancing policies, such as consumer goods trade-ins or special treasury bonds, can only partially hedge the downward spiral of domestic demand,” he stated.
An unfavorable comparison with April of last year—which featured two public holidays—which significantly boosted revenue for the catering and tourism industries, did little to improve the retail numbers.

Zichun Huang, a China economist at Capital Economics, stated that “industrial production continued to accelerate thanks to strong exports, but growth on most other indicators slowed, pointing to softer domestic demand.”

China promised to deliver unfinished homes with force and revealed plans on Friday for local governments to purchase “some” apartments as part of a fresh set of steps aimed at stabilizing the property sector rocked by the crisis.

As part of the most recent initiatives by local governments to encourage home sales, the cities of Xian and Hangzhou, home of tech giant Alibaba, both removed restrictions on property purchases earlier this month.

OVERCAPACITY

Although China’s exports have been a bright spot, experts say it’s still unclear if the uptick can last, especially in light of Washington’s renewed protectionist stance.
This week, the Biden administration imposed sharp tariff increases on exports worth $18 billion, which included a quadrupling of duties on Chinese new energy cars.

This occurs in the midst of mounting American worries that funding for China’s manufacturing sector is exacerbating the world economy’s overcapacity.
The output of integrated circuit items, new energy vehicles, and 3D printing equipment increased by double digits on Friday, according to activity statistics. China is allegedly causing industrial overcapacity in certain areas, according to US accusations.

A new front in trade hostilities with Beijing has opened as a result of the European Union’s concerns over cheap Chinese goods entering its markets. The trade conflicts began in 2018 with import tariffs imposed by the Trump administration.

MORE POLICY SUPPORT

The government has set a lofty 5% growth target for 2024, which many analysts believe will be difficult to meet without significant additional stimulus.

The latest data, according to Zhiwei Zhang, chief economist at Pinpoint Asset Management, indicated that the economy is being driven by demand from outside sources while having difficulty reviving internal demand.

“This set of macro data, combined with the weak credit data in April, may push policymakers to take stronger actions to boost domestic demand,” he stated. “The likelihood of rate cut in Q2 is rising.”

China began the issuance of its 1 trillion yuan ($138.17 billion) ultra-long special treasury notes on Friday. The bonds will have tenors ranging from 20 to 50 years, and the proceeds would be used to support the country’s faltering sectors.

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The labor environment improved, offering potential upside for demand, with the national survey-based jobless rate declining to 5.0% in April from 5.2% in March.

Huang of Capital Economics added, “And with the labor market tightening again, consumer spending may regain some momentum.”

“But none of this is likely to prevent a renewed slowdown later ahead.”

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