Growth weakens, though more structural reforms are underway

CHINA - Report 24 Sep 2021 by FAN Gang and Chunyang Wang

Growth has weakened, especially in services. In August, industrial output grew 5.3% y/y, and was up 11.2% from August 2019, with an annualized growth rate of 5.4%, down 0.2 ppts from July, and down 1.2 ppts from Q2. The service production index has slowed since Q2, and grew only 4.8% y/y in August, after being further hit by the COVID outbreaks, down 2.9 ppts from Q4 2020, and down 2.1 ppts from 2019.

Investment was up 8.9% y/y January-August, and increased 8% from August 2019, with an annualized growth rate of 4%, down 0.5 ppt from H1. Real estate is cooling dramatically, to the 2008 financial crisis level. COVID outbreaks in August negatively impacted consumption. Retail sales of social consumption goods rose 2.5% y/y, down 6 ppts from July. Their growth rate after price adjustment was 0.9% y/y. As we forecast, trade became weaker. Exports rose 15.7% y/y, down 4.4 ppts from Q2. Imports rose 23.1% y/y, down 8.5 ppts from Q2.

Producer prices increased further in August. The ex-factory price index of industrial goods rose 9.5% y/y; PPI increased 13.6% y/y, both 0.5 ppts higher from July. However, we forecast that producer price appreciation will stabilize in November, and that prices will begin to fall. CPI rose 0.8% y/y, falling for three consecutive months. We expect the lowering of CPI to be temporary, and to reach around 2%, after food prices stop declining.

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