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Economic Update

2018/09/26

Pressure building on Mainland economy

An array of economic data released in September has pointed to the possibility of a slower growth pattern in the Mainland economy (Figure 1). The most eye-catching data is regarding fixed asset investment, an important gauge of infrastructure spending. In the first eight months of 2018, year-on-year growth declined to a record low of 5.3%, compared to 7.8% during the same period last year.

Merchandise exports growth has also become weaker, despite exporters front-loading shipments to the United States to avoid future tariffs. In U.S. dollar terms, overall exports rose 9.8% year-on-year in August, compared to 12.2% in July. Excluding the contraction in March, which might have been distorted by Chinese New Year, the growth last month was the slowest so far this year.

As the shadow banking sector continued to shrink, trust loans, entrust loans and undiscounted bankers’ acceptance dropped by a total of RMB 985 billion in August compared to a year earlier. As a result, growth in total social financing, which measures the outstanding stock of financing provided by the financial system to the real economy, slowed to 10.1%. Increase in the broad money supply (M2) — covering cash in circulation and all deposits — eased to 8.2% in August.

Retail sales and industrial production did register upticks in August, but they were too marginal and insufficient to compensate for the slowdown in other parts of the economy.

According to a statement released after the meeting of the Financial Stability Development Committee on 7 September led by Vice-Premier Liu He, Chinese leaders pledged to increase targeted policy support for the economy while stressing that “monetary policy should stay prudent and neutral.” However, in the light of the China-U.S. trade war, it has become more difficult for Beijing to strike the right balance between deleveraging and stabilizing the growth of the economy.

Nevertheless, Beijing still has some room to manoeuvre. In particular, the important property market largely remains resilient. On a monthly basis, new housing prices in 67 out of the 70 major cities monitored by the government showed gains in August, up from 65 in July and 63 in June. Only one city, Xiamen in Fujian province, registered lower housing prices (-0.1%). This resilience should provide much-needed support to the Mainland economy when other parts are cooling.

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