Major activities showed signs of resilience in October. Industrial output grew 3.5% YOY, rebounding from September’s 3.1%. Growth of retail sales also accelerated to 4.9% from 4.4%. Fixed-asset investment came in at 6.1% YTD vs 7.3% in January-September. The surveyed jobless rate stayed unchanged at 4.9%.
Factory output bounced as power disruptions eased. The latest print suggests a slew of measures introduced recently to boost power supplies are now paying off. Average daily coal output reached 11.53 million tons since November, an increase of about 1.1 million tons from end-September. Import volume of coal and lignite nearly doubled in October.
Thanks to the government’s swift responses, thermal coal inventory at key power plants rebounded to 21 days of available supply. Coal futures have fallen 50% from their all-time highs in mid-October. Ongoing challenges, including a colder-than-average winter and emission controls ahead of the Beijing Olympics next February, will likely constrain output. Still, effective supply measures have mitigated the imminent power shortage risk.
The rebound in headline consumption was another positive takeaway. However, big-ticket items such as auto sales remained sluggish, an indication that the Covid-19 resurgence continued to weigh on retail spending. Twenty-one of China’s 31 provinces reported infections caused by the Delta variant during the latest outbreak. Broadening the definition of close contacts is leading to more service and travel restrictions. Cities with local infections cancelled concerts and theatrical performances and halted indoor leisure venues such as internet cafes and cinemas. High-frequency mobility indicators showed signs of stabilising but remained subdued.
Past outbreaks suggest regions more affected by infections will experience slower recoveries in consumption and household income. Even at an aggregate level, real income per capita growth of 5.2% in 3Q21 (2-year average growth) was still 1.6%ppt off the 1Q19 level. The service sector feels the tight pinch. More than half the major listed companies in the tourism and hotel industry reported net losses for July-September. We expect the impact to linger until at least the year-end due to a newly imposed suspension of trans-provincial travel in many parts of pandemic-hit provinces.
Leading indicators signal tepid property investment in the months ahead. In particular, new-home sales by top 100 developers fell 32% YOY in October. Growth in new floor space started remained in red for 3 straight months. Some signs of improvement were seen in property-related lending data thanks to some stabilisation measures of late. But a U-turn on the real estate sector policy is unlikely under the common prosperity doctrine, in our view.
More government spending may be in the works in a bid to cushion the housing market slowdown. Infrastructure projects approved by the NDRC totalled RMB167.3bn in August- September, after a six-month halt. The nation’s cabinet has earlier outlined priority areas for investment, including telecommunication networks, industrial internet, and satellite navigation. To meet funding needs, local governments are expected to expedite borrowing. As of September, the net issuance of local government bond amounted to RMB2.22tn or 61% of the annual quota.
Ensuring sufficient liquidity is key amid looming municipal bond supply. Banks’ funding conditions have tightened somewhat over the past two months, with 3M Shibor drifting higher to 2.46% today from 2.36% in early-September. Yields on AA and AA- rated corporate bonds also climbed up ~10bps to 3.93% and 6.16%, respectively. We expect PBOC’s monetary policy to remain supportive, injecting liquidity via reverse repo and medium-term lending facility. Inflation doesn’t seem to be an imminent concern. The pick-up in headline CPI last month was in part due to weather-related supply problems. Core inflation remained stable at 1.3%.
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