Rhythmic Reasoning_Full Report_Final_EN - Flipbook - Page 32
THE DRUMMER'S EAR | RHYTHMIC REASONING
sharp pullback in existing home prices may also be weighing on
household confidence and spending appetite.
Fig. 2: Economic activity softened across the board in August
YTD YoY % chg
12%
22.5% and 10.4%, respectively, these gains fell short of making
up the gap created by a $15.6 billion slide in U.S.-bound goods.
Key consumer categories like clothing, toys, and footwear posted
larger declines than in July, pointing to a continued unwind of frontloaded demand. In contrast, rare earth shipments climbed 34.7%,
reflecting trade deal arrangements.
China’s cumulative trade surplus has reached $787.5 billion year
to date, a 29% jump over last year and on pace to exceed
the 2024 record, although reflecting stagnating imports growth,
particularly from the U.S. and the E.U., rather than strength in
exports. Domestic demand remains soft, with 1.3% YoY imports
growth failing to signal greater momentum despite attempts by the
central government to boost household spending.
8%
4%
0%
2023
2024
Industrial production
Retail sales
2025
Fig. 3: Rerouting of shipments to other markets
has kept Chinese export demand afloat
Fixed asset investment
Source: National Bureau of Statistics of China,
Bloomberg Finance LP, Scotia Wealth Management
30%
15%
Fixed-asset investment growth slowed to just 0.5% YoY year-todate (YTD), the weakest reading since mid-2020, from 1.6% in July,
and 2.8% in June. The contraction in private investment deepened
to -2.3% YoY YTD, and public investment lost momentum as
well. High-frequency indicators also point to weak project starts
and tepid land sales. Industrial production grew 5.2% YoY, still
positive but at a 12-month low, coming off a 5.7% YoY rise in July,
with limited help from domestic demand. High-tech and capital
goods manufacturing posted respectable gains, suggesting some
resilience in export- and infrastructure-linked segments.
Policymakers now face a trade-off between preserving
ammunition for longer-term goals and shoring up near-term
growth. Fiscal support appears constrained by local government
balance sheets, and the central bank has so far stuck to marginal
easing. The risk is that incremental measures may be too slow
to arrest the slowdown. With core inflation weak and investment
contracting, the case for additional monetary stimulus has grown.
FADING EXPORTS AMID SLOWING GLOBAL GROWTH
EMPHASIZES A NEED TO SHORE UP DOMESTIC DEMAND VIA
POLICY SUPPORT
As alluded to earlier, the rerouting of shipments has been an
important offset to domestic economic woes. Shipments to the
U.S. have unsurprisingly been in free-fall due to ongoing trade
tensions, but stability in exports to other markets has helped keep
overall demand for Chinese goods afloat. That said, this tailwind is
also at risk of slowing as tariffs take a bite out of global growth and
subdue demand.
In August, China’s export growth slowed to 4.4% YoY, the weakest
since March, as a 33% drop in shipments to the U.S. overshadowed
gains elsewhere (Fig. 3). While exports to ASEAN and the EU rose
0%
-15%
-30%
-45%
Mar 2022
Dec 2022
Sep 2023
China Exports to U.S. (USD YoY%)
Jun 2024
Mar 2025
China Export Trade (USD YoY%)
Source: Customs General Administration PRC,
Bloomberg Finance LP, Scotia Wealth Management
On the policy front, the 1- and 5-year loan prime rates have
remained unchanged since May when the PBOC slashed the 7-day
reverse repo rate by 10 bps in response to escalating trade tensions
with the U.S. Our forecasts are calling for another 10 bps of cuts
for the 7-day reverse repo rate by year-end, followed by another 10
bps cut next year. Lower interest rates in the U.S. could potentially
pave the way for the PBOC to ease its own policy settings without
worrying about pressure on the yuan.
Of course, the effectiveness of monetary policy could be blunted
by domestic challenges, with falling home prices and households
bracing for capital losses reducing the impetus to spend or invest.
This is why a fiscal policy push is also needed, and it looks like
officials will continue to implement measures to boost growth.
According to China’s Minister of Finance, fiscal policy measures
have “ample” room to grow amid a “reasonable” government debt
ratio and controllable risks as the world’s second-largest economy
aims to shore up domestic demand in response to flagging external
demand.
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