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China in Focus: More proactive policy support

27 Oct 2023

Key Takeaways

  • China’s economic recovery accelerated in Q3, as the consumption-led recovery continued to broaden out
  • Meanwhile, the central government has approved budget changes to provide more fiscal stimulus to support growth

China data review (Sep 2023) [@source-wind-hsbc]

  • Q3 GDP rose 1.3% q-o-q or 4.9% y-o-y, putting the recovery on track to meet the government’s target of ‘around 5% growth’ for 2023. The pick-up is on the back of a broader consumption recovery, aided by policy support, which has led to positive spill-overs for the manufacturing sector. However, the property sector remains under pressure, while external demand is still weak. Therefore, even as the outlook is improving, fiscal and monetary policy may stay supportive.
  • Consumption remained the bright spot for the economy, as retail sales climbed to 5.5% y-o-y in September, up from 4.6% in August. Services consumption remains the key driver for the recovery as services-related retail sales rose by 18.9% y-o-y in the first three quarters of this year. However, we are also seeing signs of consumption strength expanding beyond just services, helped in part by targeted policies to boost durable goods sales, such as cars.
  • Manufacturing activity improved further in September on the back of stronger domestic demand. Even with a higher base and exports remaining firmly in decline, industrial production stayed steady at 4.5% y-o-y. The key drivers stemmed from strong manufacturing activity in more advanced technology areas, such as electrical machinery (11.5% y-o-y) and automobile production (9%), as well as a pick-up in energy production (4.6%).
  • The overall inflation picture remains soft in China as the pace of the recovery remains relatively gradual. China’s headline CPI edged down to 0% y-o-y (from 0.1% in August) as lower food prices outweighed higher oil prices. Core CPI remained unchanged at 0.8% y-o-y as domestic consumption continued to expand, while a pick-up in global oil and commodity prices and domestic construction activity have helped to ease PPI deflation to 2.5%.
  • China trade flows remained firmly in contraction in September. Exports declined 6.2% y-o-y, owing to broad-based weakness across regions and products as global growth continues to face pressure from tighter monetary, while global goods demand remains weak relative to services. Imports also fell 6.2% y-o-y, weighed down by the ongoing weakness in global demand, but there are signs of improvement on the back of the domestic demand recovery.

More proactive policy support

China is stepping up its fiscal support

The National People’s Congress (NPC) Standing Committee voted to make changes to the central government budget for 2023, allowing for the additional issuance of RMB1trn sovereign bonds to support growth (CCTV and Bloomberg, 24 October).

The proceeds will be directed to local governments, mainly for infrastructure projects, such as post-disaster recovery and reconstruction, and flood control. The committee also voted to approve the front-loading of local government debt from next year’s quota, which should help to address funding shortfalls towards the end of the year and allow for better planning of infrastructure projects in the coming year.

This year’s budget deficit may rise to 3.8%

Overall, the additional RMB1trn sovereign bond issuance will raise this year’s budget deficit to 3.8% (from 3.0%), and our calculation implies there will be at least an additional RMB2trn in government bond issuance in Q4, if all approved quotas are issued. An increase in the bond supply will inevitably add pressure to liquidity towards the end of the year, which may raise the chance of another reserve requirement ratio (RRR) cut in the coming months.

Easing the debt burden

Action is being taken on local government debt

Progress is also being made on the local government debt resolution front (see Chart 1). As of 23 October, 22 provinces and cities have issued or plan to issue special refinancing bonds totalling cRMB1trn to repay existing debt (The Paper, 23 October). There have also been changes to allow for more flexible arrangements to support local government debt extensions, with more support coming from state-owned banks. We think a combination of financing solutions to meet liquidity needs, as well as a structural solution are needed. More details will likely be announced at upcoming policy events, such as the Third Plenum and the National Financial Work Conference (dates have not yet been officially released).

Source: BIS, Wind, HSBC estimates

Monetary policy still supportive

Monetary policy supporting growth and confidence

Meanwhile, China’s monetary policy stance remains unchanged and still accommodative.Indeed, on 21 October, Pan Gongsheng, Governor of the People’s Bank of China (PBoC),continued to emphasise that macroeconomic policies should be accurately and effectively implemented, financial supervision should be strengthened, and efforts should be made to expand domestic demand, boost confidence, and prevent risks (, 21 October).

Source: Refinitiv Eikon
*Past performance is not an indication of future returns. Source: Refinitiv Eikon. As of 24 October 2023 market close.
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1. This report is dated as at  26 October 2023.

2. All market data included in this report are dated as at close 24 October 2023, unless a different date and/or a specific time of day is indicated in the report. 

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