Mixed Signals in China's Growth Path

New data released by Chinese government authorities may be making its mark on market sentiment on Thursday, 15 August. As mixed signals emerge both from the latest economic reports as well as market behaviour on key indices, savvy market watchers may wish to get deeper insight into the latest market movements in the world’s second-largest economy. Let’s take a look:

Assembly Lines Slowing Pace?

According to data released on 15 August, China's factory output slowed for the third consecutive month in July, indicating that the recovery of the world's second-largest economy is losing momentum. However, the consumer sector showed slight improvement as stimulus measures targeting households began to take effect.

This mixed batch of economic data highlighted a patchy start to the second half for the $19 trillion economy, raising concerns among policymakers. Earlier this month, disappointing figures in exports, prices, and bank lending had already signalled trouble. The National Bureau of Statistics reported that industrial output grew by just 5.1% in July compared to the previous year, a decrease from June's 5.3% and falling short of analysts' expectations of 5.2%.

In contrast, retail sales increased by 2.7% in July, an improvement from June's 2.0% rise and surpassing predictions of 2.6% growth. Analysts suggest that this data increases the urgency for policymakers to introduce more support measures aimed at consumers rather than continuing to fund infrastructure projects.

Some experts, have also noted that economic momentum stabilised somewhat in July, with a rise in consumer spending and service activity offsetting a slowdown in investment and industrial production. Accordingly, a modest recovery in the coming months, buoyed by increased government support, may be expected.

Key figures in the country's ruling Chinese Communist Party have recently indicated a shift in economic strategy, moving to a greater emphasis on stimulating consumer demand rather than investing in infrastructure and manufacturing. The state planner announced that nearly $21b from special debt issuance would be allocated to a consumer goods trade-in programme.

Despite these efforts, challenges remain. The property sector, which accounts for 70% of Chinese household wealth, continues to struggle, with new home prices falling at their fastest pace in nine years in July. Additionally, commodities usage declined, with oil (CL) refinery output down 6.1% year-on-year and crude steel production falling for the second month.

Although the government is targeting 5% economic growth this year, analysts warn that without more robust reforms and additional support measures, China risks falling into a prolonged economic downturn similar to Japan's in the 1990s. For the Heavenly Kingdom, the road ahead seems unclear at this point; whether these negative predictions are borne out will surely have an outsize effect on the health of markets all over the globe. (Source: Reuters)

Asian Stocks Get Boost

The latest data may point out a coming wave of Chinese government stimulus, but Asian stocks saw mixed results on 15 August.

The Hang Seng Index (Hong Kong 50) showed strong gains earlier in the session, by 3:00 PM it was down by 0.3%, while the Nikkei 225 (Japan 225) marked a nearly 0.8% rise.

Key performers included Meituan (3690.HK), a food delivery platform, which rose by 0.5%, and Macau casino operator Sands China (1928.HK) increased by nearly 0.6%. Electric vehicle maker BYD (1211.HK) also marked a 1.3% increase in value.

Despite weak economic fundamentals, analysts suggest increased potential for new stimulus measures emanating from Beijing, which may be bolstering market optimism and offsetting concerns about China’s economic growth.

Conclusion

China's slowing industrial output contrasts with slight improvements in consumer spending, creating a mixed economic outlook reflected in traders' behaviour on Thursday, 15 August. While the government’s efforts to stimulate consumption show promise, persistent challenges in key sectors raise concerns about sustained growth. The effectiveness of further policy measures will be crucial in determining the country's economic trajectory; traders and investors alike will have to wait and see how it all pans out.