China's economy showed initial signs of stabilization in November, as the ongoing stimulus measures took effect. Industrial production remained resilient, supported by robust export growth. Consumption was supported by equipment and durable goods upgrade. However, fixed asset investment and loan growth remained lackluster. The weakening aggregate demand calls for further easing. (China Central Economic Work Conference and 3 objectives for 2025)

1. Trade

Resilient external trade stayed as a bright spot in November. Frontloading activities fueled external demand ahead of the commencement of tariffs under the new US administration. Exports growth increased from 5.1% YoY in first 10 months to 12.7% in Jan-Nov. High-tech products, electronics, and automobiles grew resiliently year-to-date and saw the strongest growth among the major products during the month. Traditional products such as agricultural and texiles saw uptick in November.

Early indicators such as Caixin SME exporter-focused index expanded further to a five-month high of 51.5 in November. Official new export orders sub-PMI also saw an uptick from October. Strong output sub-PMI also aligned with the resilient growth in industrial production.

2. Industrial production

Industrial activities held up well on both steady external and domestic demand. Industrial production slightly increased from 5.3% YoY in October to 5.4%, with YTD growth stayed at 5.8%. EV production grew by 51.1% YoY in November. Industrial robotic also surged 29.3% YoY amid equipment renewal initiatives. Production in ferrous and non-ferrous metal smelting and processing industry grew steadily by 6.7% and 7.4% YoY, indicating a gradual pick up in domestic demand.

3. Fixed asset investment

Headline fixed asset investment (FAI) growth eased slightly from 3.4% YoY YTD in October at 3.3% in November. The contraction of -0.4% in the private sector and -20% in foreign direct investment remained as key drags.

State sector investment, as the key driver of FAI growth, grew steadily at 6.1% YoY YTD. Utility and infrastructure investment are leading the march. Manufacturing investment boded well. Spending in both general and professional equipment saw double-digit growth.

4. Property

Real estate investment was a drag, down 10.4% YoY YTD, with residential floor space starts decreasing 23.1% YoY. Property developers are prioritizing the completion of unfinished homes, resulting in a relatively smaller decline in completed floor space. Residential inventory saw improvement from record high 32 months to 27 months as of October, amid the narrowing decline in primary market sales in 300 cities.

5. Retail sales

Retail sales growth fell from 4.8% YoY in October to 3.5% in November, with the YTD growth staying at 3.5% YoY in first eleven months. While the slowdown was somewhat distorted by the high-base comparison, the negative wealth effect from asset markets continued to cloud consumption sentiment. Sales of big-ticket items, luxuries, and construction materials contracted.

Hopefully the CNY300 billion consumption upgrading subsidy, equivalent to 0.6% of retail sales, will cushion the downtrend. Spending on household electronic appliances jumped from 2.3% YoY YTD in July to 9.6% in November. Communication appliance also rose by 9.5% YoY YTD.

6. Money supply

M1 found its footing amid stabilizing consumption sentiment. The decline in M1 narrowed from historical low of 7.4% YoY in September to 3.7% in November, while M2 growth stayed above the 7% level. The gap between short-term M1 and time deposit M2 growth narrowed from 13.6 percentage points in September to 10.9 percentage points in November. This implies that households are more willing to hold liquid cash for consumption, as a result of ongoing stimulus measures.

7. Loans

However, weak credit demand remained a concern. Loan growth further slowed from 8.0% YoY to a historical low of 7.7% YoY in November. This was mainly dragged by mid- to long-term loans. That of household, primarily known as mortgages, dropped 19% YoY in the first eleven months amid falling property prices. On the corporate loan front, pressure remains on new corporate borrowing amid high real financing costs, with new medium- to long-term loans dropping 21% YoY year-to-date last month.

8. Inflation

Modest inflation leaves room for further rate cut. The consumer price index (CPI) eased further from 0.3% YoY to 0.2% in November. Rent dropped for the 8th consecutive month. Core CPI, excluding food and energy, slightly increased to 0.3%, indicating weak consumer spending sentiment.

Producer prices remained in contraction territory for more than 2 years due to sluggish domestic demand. Upstream raw material and manufacturing prices dropped 2.9% and 2.7% YoY, respectively, in November. The decline in automobile prices persisted amid price competition and overcapacity.

Conclusion

Strong stimulus measures, ranging from interest rate cuts to increased public spending, have been the hallmark of China's policy approach since September. This is expected to help the economy sustain a growth rate of around 5.0% in 2024 and 2025. However, China's economy will continue to face various risks, from the property market to strained local government finances, and from persistently weak aggregate demand to a highly probable escalation of trade and technology conflicts. We foresee room for a 10bps reduction in the 1-year LPR in December, followed by an additional 50-basis-point cut in 2025.


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