Economic growth slowed from 4.7% YoY in 2Q24 to 4.6% in 3Q24, while sequential growth accelerated from 0.7% QoQ in 2Q24 to 0.9% in 3Q24. Despite net exports remaining a pillar for GDP growth, the decelerated external demand in September stripped away the only bright spot in the economy. Industrial production continued to slow down, amid tepid domestic demand. Consumption sentiment stayed subdued amid higher unemployment rates. Reflecting the feeble growth momentum, fixed asset investment and loan growth were lacklustre. The weakening growth momentum calls for further easing. The PBOC, NDRC, MOF, and MOHURD introduced their new stimulus policies in their respective press conferences. The last two months of 2024 will be an important window for observing incremental fiscal policies.

1. Trade

Bright spot in external trade slowed in September. Exports growth declined from 8.7% YoY in August to 2.4%, resulting in a 4.3% YoY YTD.  Even major products such as high-tech products, electronics, and automobiles retreated.

The deceleration aligned with the contracting SME exporter- focused Caixin Manufacturing PMI in September. The decline in manufacturing PMI of major trade partners also suggested a weakened demand in Chinese goods.

2. Industrial production

Industrial activities accelerated despite weakened domestic demand. Industrial production increased from 4.5% YoY in August to 5.4%, with YTD growth accelerated to 5.8%. External demand on key products uplifted EV and integrated circuit production by 48.5% and 17.9% in September, respectively. Industrial robotic also surged 22.8% during the month amid old equipment renewal initiatives.

3. Fixed asset investment

On investment front, headline fixed asset investment (FAI) growth remains at 3.4% YoY YTD in September. The contraction of 0.2% in private sector remained as key drag in FAI. State sector investment, as the key driver of FAI growth, slightly improved to 6.1% YoY YTD.

4. Property

Real estate investment was a key drag, remaining at 10.1% YoY YTD with residential floor space starts decreasing 22.4%. Property developers are prioritizing completion of unfinished homes, resulting in a relatively smaller decline in completed floor space. Residential inventory also retreated from the peak of 31.8 months in March to 28.3 months in August.

MOHURD briefing yesterday highlighted two key priorities. First, the government will provide cash compensation for 1mn units involved in shantytown projects. And second, it will step up in credit support for White-List projects to RMB 4trn by end of 2024. This means the total amount will be up by 79.3% in 4Q from the RMB 2.23 tn approved loan YTD. Real estate development sources of funds fell by over 20% for 3 consecutive years.

5. Retail sales

Regarding consumption, retail sales growth decelerated from 3.4% YoY in first eight months to 3.3% YTD in September. Sales of big-ticket items including automobiles, luxuries, and construction materials were muted. Even growth in leisure expenditures on areas like sports and entertainment slowed. Hopefully, positive wealth effect from recent equities market rally could restore spending confidence to some extent.

Money supply

Tight liquidity conditions in the system warrant additional monetary easing. M1 saw the deepest contraction of 7.4% YoY on record in September. Meanwhile, M2 growth rebounded from an all-time low of 6.2% in June to 6.8%. The gap between short-term M1 and time deposit M2 growth widened to 14.2ppts, the highest since May 2012. This trend is weighing on commercial banks' net interest margins. It also implies households and corporates are unwilling to hold liquid cash for consumption and investment.

6. Loans

Weak credit demand is a concern. Loan growth further slowed from 8.5% YoY to historical low of 8.1% YoY in September. Decline in corporate borrowing continued to expand due to high real financing costs, with new medium- to long-term loans dropping 18.7% YoY YTD last month. Household borrowing, a gauge of mortgages, also further shrank by 26.7%, indicating weak economic growth momentum.

7. Inflation

Modest inflation leaves room for further rate cut. Consumer price index dropped from 0.6% YoY to 0.4% in September. Transportation and Communication were the major drag amid oil price decline. Core CPI, excluding food and energy dropped to a 3-year low of 0.1%, indicating weak consumer spending sentiment persists. The decrease in producer prices also expanded from -1.8% YoY to -2.8% in September due to sluggish domestic demand.

8. Conclusion

The weakening growth momentum calls for further easing, and we expect more stimulus measures will be announced in 4Q24 and 2025. We expect The People's Bank of China (PBOC) to have another 1Y LPR cut by the end of this year, bringing rate to 3.05% by the end of the year. The window for benchmark rate cut has emerged as major central banks are proceeding with rate cut cycles. The CNY exchange rates could take a breather.


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