China’s economy improves, yuan rebounds

KEY DEVELOPMENTS

China’s domestic economic data was upbeat last week. The equity market reception was mixed, but the offshore yuan was a primary beneficiary. Retail sales were up 7.6%, but consumers were cautious about spending on big-ticket and high-value items. Industrial output rose by 4.6%. China’s power generation rose 4.4% YoY in the year's first ten months. The urban jobless rate stood at 5% in October, unchanged from September. Abroad, the Xi-Biden meeting in San Francisco re-established communication, but little substance was agreed to benefit the Chinese economy.

China’s Central Bank kept the key lending rate unchanged at 3.45% for 1-year LPR, and 4.2% for 5-year LPR on Monday as anticipated. The Shanghai and Shenzhen Composite Indexes rose 0.46% and 0.25% on Monday, while the Chinese yuan gapped higher to $/CNH 7.17 from Friday’s $/CNH 7.24 close, the strongest in three and a half months. 

GLOBAL IMPACT

Chinese investors need to be more convinced about the domestic economic recovery, with a mixed performance from key stock indexes. Foreign investors are more encouraged with the yuan strengthening. Primary bond issuance by central and local governments to support investment spending nonetheless risks crowding out domestic borrowing unless bank liquidity is allowed to increase. This might continue to put pressure on the yuan.

MARKETS

• Chinese stock markets were mixed last week. The Shenzhen Composite Index, favored by retail investors, fell 0.3%, selling off later in the week. The Shanghai Composite Index, representing larger government-controlled companies, rose 0.3%.
• The offshore yuan rallied strongly, rising 1.2% versus the dollar from $/CNH 7.305 to $/CNH 7.217, and many analysts believe the period of the greatest depreciation pressure is over.

MAJOR NEWS

Xi offers US partnership, but Taiwan issue remains

• At their meeting in San Franciso, President Biden reaffirmed the US’s stance on Taiwan to President Xi Jinping, repeating that the US would defend Taiwan if it invaded, while Xi reiterated that China would eventually reunify the Island
• President Xi reassured foreign investors that China remains a partner and friend but didn’t address strategic issues: the US diversifying its supply chains away from China, investing in its industrial base, and protecting its most sensitive technology
• Instead, Xi promised better personal connections: increasing the number of flights, speeding up visa procedures, expanding tourism, and welcoming 50,000 young Americans over the next five years on exchange and study programs

Accelerating domestic investment

• China will accelerate a one trillion-yuan treasury bond to back key investment projects, the country’s top economic planner, the National Development and Reform Commission (NDRC), pledged last week.
• The central government will front-load part of the local government bond quota for 2024
• China’s Ministry of Finance promised to issue bonds starting in mid-November.
• Analysts expect fiscal aid will support China’s economy in the first half of 2024

Loan finance data worrying

• China’s newly increased yuan loans beat market expectations, reaching 738 billion yuan ($101 billion) in October, more than the anticipated 665 billion yuan ($91 billion), and up 20% year-on-year
• Yet the detail contained negative indications
• Medium- and long-term loans to enterprises, a measure of business sentiment, fell to 382.8 billion yuan ($52 billion), 17.2% lower than 462 billion yuan ($63 billion) last year
• Medium- and long-term loans to households, a measure of newly increased house loans and confidence in the property market, moderately increased by 71 billion yuan ($9.7 billion), well down from 547 billion yuan ($75 billion) in September and significantly below the seasonal level

China’s foreign Investment is Growing

• China’s overseas non-financial investment, a measure of China’s participation in global investment on investment projects and infrastructures, was up 11% year-on-year at $105 billion in the first ten months of this year.
• Strong growth shows Chinese enterprises relocating production overseas to better suit the global trade landscape.
• China’s investment in Belt and Road Initiative counties and regions rose 20% year-on-year to $25.85 billion, a quarter of total overseas investment.

Electricity use slows, hinting at slowing economic momentum

• Electricity consumption rose 8.4% year-on-year in October, slowing from 9.9% in September but still higher than the level between June and August
• China’s electricity consumption has increased 5.8% year-on-year in the first ten months of the year
• Electricity use in the manufacturing and services sectors rose 8.6% and 14.4%, respectively
• Chinese power generation rose 5.2% year-on-year in October, slowing after 7.7% last month
• The priority has challenged China's goal of cutting carbon emissions to ensure the country’s energy supply
• China shifted back to coal-fired energy this year, and carbon emissions rose 4.7% year-on-year in the third quarter, missing its projected goal to reach peak carbon emissions by 2030
• China is expected to add 290 GW in renewable energy capacity in 2023, nearly doubling the capacity added in the previous year

Stronger retail sales growth

• China’s retail sales continued to expand in October, up 7.6% year-on-year, after 5.5% year-on-year growth in September.
• Holiday spending during the 8-day national holiday this month boosted consumption.
• Consumers were cautious about spending on big-ticket and high-value items
• Auto sales were up 5.3% in the year-to-date, while sales for electronic and telecommunication devices were up 5.2% in the year-to-date

Shopping festival points to cautious customers

• China’s annual online shopping festival, "Double 11", ended last weekend
• China’s largest e-commerce platform, Alibaba, reported positive growth during the festival, and its peer, JD, also said sales volumes were at a record high, but exact sales data and details were unavailable
• One survey of the event suggested a significant “consumption downgrading” this year as customers tend to look for value-for-money products

Home prices continue to fall

• Property sales and home prices in major Chinese cities saw the steepest drop in nearly nine years, the official data showed last week, despite attempts to boost housing demand.
• Property sales by the country’s top one hundred developers extended their decline, falling by 27.5 % year-on-year in October.
• Home prices in seventy cities fell 0.4% month-on-month, the worst since the 0.5% decline in February 2015