China’s economy stabilizes as electricity spending and supply increase

China’s economy fared better than expected in October as retail sales rose and energy shortages eased, although a housing slump and rise in COVID outbreaks show the recovery is not yet solid.

Industrial production rose 3.5% in October from a year earlier, while retail sales growth accelerated to 4.9%, beating economists’ forecasts. Fixed asset investment growth slowed to 6.1% in the first 10 months of the year as tighter restrictions in the real estate market continued to weigh on the sector. The recorded unemployment rate was stable at 4.9%.

The better-than-expected numbers bring some relief after the economy’s momentum has weakened in recent months due to energy shortages, Beijing’s control of the property market and widespread COVID-19 outbreaks. However, the recovery remains uncertain, given the outsized contribution of real estate – at 25% of GDP when related industries are included – and the disruption of travel and spending due to the strict virus restrictions imposed by the government.

“Overall, there is some improvement, especially in the mining and utilities industries,” said Lu Ting, chief China economist at Nomura Holdings Inc. “But other areas have not improved. in fact not substantially improved and remain at low levels, especially for investments.”

Lu said rising prices and the panic of consumers buying goods in early October may have contributed to the recovery in retail spending last month. Adjusting for inflation, retail sales rose 1.9% in October from a year ago, a slower pace than in September.

Electricity shortages, which had been a major constraint to industrial output in September, eased last month as electricity supply rose 11.1% in October from a year earlier.

The real estate crisis continued to weigh on production, with production of construction-related commodities, such as steel and iron, contracting. Investment in new construction fell for a fourth month, falling 7.7% from a year ago.

Separate data from the NBS showed house prices fell 0.25% in October from the previous month, a bigger drop than in September. The benchmark stock index was about 0.3% lower as property developers fell further after the news of falling house prices.

What Bloomberg Economics says…

October’s stronger-than-expected activity in China offers some assurance that the economy is not sinking deeper into a rut, although there are no signs that it is ready for a turnaround. One extra working day in the month was one of the reasons for the better image. Even taking this into account, production seems to be stabilizing.

Chang Shu, Chief Asia Economist

The BES said in a statement that the economy “was generally stable and maintained the recovery trend.” He warned that “the international environment is still complicated and severe with many unstable and uncertain factors.”

Iris Pang, chief economist for Greater China at ING Groep NV, said rising COVID cases will continue to weigh on the outlook for the economy.

“The potential for sudden and tight restrictions on domestic travel means people are still very reluctant to travel,” she said. “This may continue during the upcoming Chinese New Year holiday in February 2022.”

The slowdown has put the spotlight back on policymakers, who have so far taken a low-key approach to stimulus, preferring to “tweak” policies rather than flood the economy with support. In line with this approach, the People’s Bank of China refrained from injecting additional liquidity into the financial system during its monthly liquidity operation on Monday, rolling over all maturing loans instead.

Most economists expect Beijing to stick to housing restrictions, which will lead to weaker growth next year. GDP growth is expected to slow to 3.5% in the last quarter, rise to 8% for the year as a whole and weaken to 5.4% in 2022, according to a Bloomberg survey of economists.

“Growth is likely to weaken in the rest of this year,” said Zhang Zhiwei, chief economist at Pinpoint Asset Management Ltd. “The slowdown in the real estate sector has continued, which is the main risk to the macroeconomic outlook over the coming quarters.”

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