China’s economy remains under the pressure of a “double whammy” of adverse weather conditions and weakening demand, Citi stated in a Monday note to clients. This combination could further exacerbate the already challenging economic environment, potentially putting the government’s “around 5%” growth target at risk.
In August, economic activities in China deteriorated further. Industrial production is projected to slow to 4.5% year-on-year, and retail sales growth may soften to just 2.0% year-on-year due to a lack of consumer confidence and a higher base effect. Notably, the contraction in crude steel output deepened to -8.5% year-on-year, worsening from July’s -5.3%, Citi highlights.
The auto sector also faced headwinds, with sales worsening to -4.4% year-on-year in August from -2.8% in July, even as car trade-in subsidies doubled. Although there was some support for restaurants from summer spending, fixed asset investment growth is expected to slow to 3.3% year-to-date, despite accelerated government bond issuance.
“Even with acceleration in government bond issuance, we doubt how effective the proceeds could be deployed for investment before the grip on debt management is loosened,” Citi economists said in the note.
On the external front, while exports growth is expected to moderate to a still solid 6.8% year-on-year, imports are likely to soften to around 4.0% year-on-year. The projected trade surplus stands at approximately $77.8 billion. However, China’s composite shipping cost index fell by -9.5% month-on-month, indicating weakening external demand, with manufacturing PMIs declining in both the U.S. and EU.
Inflation trends are expected to change as well. Citi forecasts CPI inflation to edge up to 1.0% year-on-year in August, driven primarily by food price inflation. Pork, egg, and vegetable prices saw marked monthly increases, which could contribute to headline CPI “reflation,” economists note. However, they do not see “any price support beyond that.”
Meanwhile, the outlook for producer prices remains bleak, with PPI deflation projected to deepen to -1.4% year-on-year.
Citi also noted that despite the rapid pace of government bond issuance, credit demand from both households and corporates is likely to remain subdued. The property sector continues to struggle, with new home sales down -24.3% year-on-year in the top 30 cities, and corporate credit demand showing little sign of improvement.