China’s Economy Faces Double Whammy: Citi

Chinese economic conditions are currently being challenged by a combination of adverse weather and declining demand, according to a recent note from Citi directed at its clients. This dual challenge could make the already difficult economic landscape even tougher, potentially jeopardizing the government’s target growth rate of approximately 5%.

In August, China’s economic activities saw further deterioration. Industrial production is expected to decelerate to a year-on-year growth rate of 4.5%, while retail sales may experience only a 2.0% gain year-over-year, which can be attributed to waning consumer confidence and a higher comparison base. Notably, the downturn in crude steel production worsened, dropping to an annual rate of -8.5%, a decline from July’s -5.3%.

The automotive industry also faced challenges, with sales declining to -4.4% year-on-year in August, down from -2.8% in July, even with an increase in car trade-in subsidies. While summer spending provided some temporary relief for restaurants, growth in fixed asset investment is projected to slow to 3.3% year-to-date, despite more government bonds being issued.

Citi economists expressed skepticism about the utility of the proceeds from these bonds, noting that it may be challenging to use the funds effectively for investment before easing strict debt management controls.

On the trade front, exports are anticipated to grow at a solid rate of 6.8% year-on-year, but imports may decrease to approximately 4.0% year-on-year. The expected trade surplus stands around $77.8 billion. However, a significant drop of 9.5% month-on-month in China’s composite shipping cost index indicates weakening external demand, further evidenced by declining manufacturing PMIs in both the U.S. and EU.

Inflation trends are also expected to shift, with Citi predicting a slight increase in Consumer Price Index (CPI) inflation to 1.0% year-on-year in August, primarily driven by rising food prices. Significant monthly price increases for pork, eggs, and vegetables may contribute to marginal CPI inflation, although economists do not foresee any sustained price support beyond this.

Conversely, the outlook for producer prices is grim, with the Producer Price Index (PPI) deflation anticipated to deepen to -1.4% year-on-year.

Additionally, despite extensive government bond issuance, credit demand from households and corporations is expected to remain low. The property market continues to face difficulties, with new home sales in the top 30 cities plummeting by 24.3% year-on-year, and there is little indication of improvement in corporate credit demand.