CHINA’S AGGREGATE DEMAND SHOWS SIGNS OF CATCHING UP

China’s August data set came in on the strong side. Even more importantly, the recovery seems to broaden to the demand side which had been lagging behind so far.

Highlights:

  • China’s latest activity data surprised on the upside. While a payback-effect from previous flooding may be involved, there are signs that the recovery is broadening more to the demand side.
  • Investment in the manufacturing sector and parts of retail sales were especially lagging but now have started to catch up. Credit data are still strong even though the People’s Bank of China (PBoC) stopped short of easing monetary policy further.
  • Consequently, the strong data will likely put the PBoC in a wait-and-see mode for the time being. Unless the weakness in the labour market also turns around, we still see a case for a 50 bps RRR cut (plus Loan Prime Rate cut by 20 bps) late this year. Fiscal support (as announced in the NPC meeting in May) is likely to become more visible in H2.
  • We expect the recovery to continue and revise our growth forecast up to 2.2% in 2020.

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