China: Small improvement in fundamentals in August – UOB

Economist at UOB Group Ho Woei Chen, CFA, reviews the latest set of results in the Chinese economic calendar.

Key Takeaways

“Improvements were seen across China’s data including the industrial production (IP), retail sales, fixed asset investment (FAI) and surveyed jobless rate in Aug. The numbers were also slightly ahead of Bloomberg’s consensus forecasts which we think were set quite modest given the worsening economic outlook including the COVID situation and power crunch in Aug.”

“Due to challenging outlook both internally and externally, we are maintaining our 2022 GDP growth forecast for China at 3.3% with 3Q22 at 3.4% y/y and 4Q22 at 4.5% y/y, a recovery from 2.5% y/y in 1H22.”

“The People’s Bank of China (PBoC) maintained the 1Y medium-term lending facility (MLF) rate at 2.75% in Sep and rolled over CNY400 bn of the CNY600 bn that expired this month. This was after the central bank cut the 1Y MLF rate a second time this year in Aug, by 10 bps.”

“As consumer and producer price inflation both pulled back in Aug and economic outlook remains weak, we continue to see scope for a further 10bps cut to the 1Y MLF in 4Q22. This will bring a corresponding drop in the loan prime rates (LPR). We forecast the 1Y LPR to move lower to 3.55% by end-4Q22 (from current 3.65%). After 35 bps cut YTD, the 5Y LPR is still poised to fall further (from current 4.30%) as PBoC extends support to the property market.”