DRIVING THE DAY
1. Data dump – surprisingly decent monthly econ data
China’s stats bureau released August economic data this morning.
The numbers looked pretty decent,though the pace of overall growth remains very weak.
Retail sales grew at 9% y/y – up from 8.8% in July.Year-to-date retail sales grew at 9.3% y/y through August – the same rate as the first seven months of the year.Growth of industrial production inched up to 6.1% y/y – from 6% in July.But on a year-to-date basis industrial production decelerated to 6.5% y/y through August – a touch down from the 6.6% growth in the first seven months of the year.
Quick take 1: the improvement in consumption seems to have been driven by the purchase of oil products, gold and precious jewels, and daily necessities. Those purchases do not indicate a healthy consumer market.
Quick take 2: Industrial output was driven by an uptick in steel, cement, and aluminum – the first two of which will have been driven by solid property construction in August.
The upshot: Any data improvement is a good sign, but we don’t see August as an inflection point. Neither consumption nor industrial production look to be on a new accelerating trend.
FINANCE & ECONOMICS
2. Infrastructure investment still weighing on growth
There was also a flicker of light on the investment side:
Year-to-date investment growth fell to 5.3% y/y – from 5.5% in the year-to-July.But in August alone, growth came in at 4.6%y/y – up from 3% in July.That occurred on the back of improved manufacturing investment, which accelerated in August.Infrastructure investment, however, fell further into negative territory, contracting by 4.3% y/y – down from a 1.9% contraction in July and average positive growth of 8.1% in the first seven months of the year.
Quick take: The investment numbers mirror the retail sales and industrial data – a surprising improvement, but we are not yet convinced this is a new accelerating trend.
Get smart: Infrastructure investment continues to weigh on overall investment and overall economic growth. The push to get local governments spending more, which started in early August, has yet to take hold. And as long as infrastructure spending is contracting, the economy is unlikely to genuinely turn a corner.
FINANCE & ECONOMICS
3. Local governments feel constrained fiscally
Why is local infrastructure spending still so weak? Because the central government is continuing its effort to control local debt.
Some context: The Party issued two policy documents earlier this year – one on thoroughly identifying off-balance-sheet debt and one imposing lifetime accountability for debt on officials. (see August 16 and August 28 Tip Sheet).
We are starting to see results.Local governments are paying back some of their debt by selling off more land.
And one local finance official had this to say:
[The local government] no longer wants to conceal the size of debt size."But per the previous entry, they have a difficult line to tread as the economy slows. In the words of another local official:"On the one hand, … it is necessary to borrow legally.""On the other hand, there are limited sources of funds.""We will strictly enforce the documents issued by the central government.""We are reducing investment projects. Investment must be done within our capabilities."
Get smart: With efforts to control local govt debt gaining steam, don't expect the economy to pick up.
21st Century Biz: 化解地方债风险：部分市县拟加快土地资产变现
POLITICS & POLICY
4. Premier Li wants a fairer market
On Thursday, Li Keqiang paid a visit to the newly-created State Administration for Market Regulation (SAMR).
Some context: The SAMR is a new super-regulator, created as part of the MASSIVE government restructuring that took place in March. (To wrap your head around the restructuring, check out our sweet infographic.)
Li told assembled regulators that they have to change their mindset:
“Your job is not to supervise the market by planning.”“China…cannot follow the old path of relying on investment and fiscal [spending].”Instead, China needs a more vibrant market environment:“Stimulating market vitality and fair regulation complement each other.”“If we don’t have fair regulation, then we will not have fair competition, …and that could allow rent-seeking and corruption to flourish.”
Get smart: Many of China’s market sectors are super inefficient, often because of administrative barriers. If the SAMR can succeed it reducing those barriers, it could provide a boost productivity.
Xinhua: 李克强：加强公正监管 营造公平竞争市场环境
POLITICS & POLICY
5. Efforts to control SOE debt are ramping up
Yesterday, authorities published new measures to reduce debt levels at state-owned enterprises (SOEs).
We told you this was coming (see April 27 Tip Sheet).
What the new measures do:
“The average debt-to-asset ratio of SOEs should be reduced by 2 percentage points by the end of 2020, compared with the end of 2017.”“After 2020, the debt-to-asset ratio of SOEs should be kept at the average level of companies in the same industry with the same scale.”“Warning and monitoring systems for companies’ assets and liabilities should be established.”“A time limit should be set for companies with high leverage to reduce their debt-to-asset ratio.”“A clear boundary should be set to separate government debt from corporate debt, with local governments strictly banned from borrowing in the form of corporate debt.”
Get smart: That last point is important, and just one more reason why we should not expect a pick up in investment at the local level.
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