By Michael Lelyveld
China’s economy has sent mixed signals on its recovery in a little over a week as retail sales rose slightly after earlier signs of sluggish demand.
On Tuesday, the National Bureau of Statistics (NBS) reported positive results for retail sales in August with an 0.5-percent gain from a year before, marking the first monthly increase of 2020.
Industrial production in August also improved, climbing 5.6 percent year-on year after 4.8-percent growth in the previous two months.
But fixed-asset investment (FAI) in long-lasting items like buildings and machinery continued to lag, declining 0.3 percent in the eight-month period, strengthening only marginally from a 1.6-percent loss through July,
On the surface, China’s recovery is picking up speed, forcing analysts to revise their readings on the rebound from the COVID-19 crisis after discouraging trade data only nine days before.
On Sept. 6, the General Administration of Customs (GAC) also reported mixed results for trade in August as exports topped forecasts with a 9.5-percent dollar-denominated increase.
But import weakness also exceeded expectations on the downside, falling 2.1 percent in dollar terms, dropping from a 1.4-percent decline in July.
The poor import performance was seen as a sign of softness in consumer demand, a problem that has shadowed China’s recovery claims for industrial output and gross domestic product growth.
Retail sales growth in July seemed to stall with a month- on-month rise of 0.85 percent following an 0.83-percent increase in June, according to NBS figures. Even that small improvement may have relied on the extra day in the month of July.
“China’s recovery is still ongoing, but not so strong anymore,” said Xu Hongcai, deputy director of the Economic Policy Commission at the China Association of Policy Science, as quoted by the South China Morning Post.
“Everyone is worried about employment, and income is declining, so everyone dares not to spend much money,” Xu said.
The weakness in imports and sales came despite record inflows of foreign oil in June and July, as well as a push to meet terms of China’s Phase 1 trade deal with the United States before the end of the year.
China has also been adding to its stockpiles of other commodities like food and mining materials that may become subject to price spikes due to shortages abroad or U.S. sanctions, the Nikkei Asian Review reported.
“Beijing is keen to keep its reserves high to avoid shortages that could spark domestic discontent,” Nikkei said.
Without those front-loaded increases, China’s import decline would have looked even worse.
The same could be said of the government’s multi-faceted attempts to stimulate domestic demand with eased lending policies, tax breaks, subsidies and local discount coupons.
The signs of weak consumer demand stood in contrast to relentless state media reports on the public’s return to schools, factories and movie theaters as COVID-19 restrictions are eased.
But official economic reports have yet to reflect the impact of two months of the most severe flooding in years in the vast stretches of the Yangtze River basin, with typhoons lashing coastal areas as far as the industrial northeast.
Some analysts argued that the reports of China’s economic recovery have gotten too far ahead of themselves.
“We believe markets are somewhat too optimistic on China’s growth in the second half of the year,” Lu Ting, chief China economist at Nomura, told the Morning Post on Aug. 14.
Last month, Bloomberg opinion columnist Anjani Trivedi wrote that “it’s getting harder to say what the true state of China’s economy is. The numbers are all over the place.”
But this week’s NBS sales numbers gave rise to more positive readings, although they fell something short of a clear turnaround.
“The stronger-than-expected activity data in August support our recent decision to raise our Q3 and Q4 (third and fourth quarter) to 5.2 percent (year-on-year) and 5.7 percent, respectively,” said Nomura’s Lu in a research note quoted by CNBC on Sept. 14.
But Lu continued to voice caution over uncertainties including the strength of pent-up demand and “rising U.S.- China tensions (that) could dent China’s exports and manufacturing investment.”
In a series of mixed signals, President Xi Jinping has chosen a curious time to unveil two new initiatives that conveyed an expectation of more economic troubles ahead.
Xi’s latest slogan for economic strategy, called “dual circulation,” only received widespread media coverage in late July, although official chroniclers claim it was first concocted in May.
The complicated concept downgrades the importance of exports to China’s economic growth, elevating domestic consumption to the status of prime mover.
The two segments would allow “domestic and foreign markets (to) boost each other,” essentially taking whatever benefits from trade that China can get.
Last year, consumer spending accounted for 57.8 percent of GDP growth, according to the NBS, but that was before COVID- 19 brought the economy to a halt.
On Sept. 7, the government issued a belated warning about the weakness of consumption and its effect on the economy.
“COVID-19 has made a big impact on consumption,” said Premier Li Keqiang in a statement issued after an executive meeting of China’s cabinet-level State Council.
“Consumption … has been significantly affected by COVID- 19 this year and become a drag on economic recovery,” the official Xinhua news agency said.
“For China to achieve positive growth this year, boosting consumption is vitally important,” Li was quoted as saying.
So far, the numbers for retail sales and trade suggest that just the opposite of the dual circulation forecast has been taking place as exports outshine expectations and domestic demand has fallen short.
The mishmash raises the question of whether the government has gotten its policy wrong or whether it is forecasting more weakness to come. In either case, dual circulation is hardly a catchy slogan or an economic confidence builder.
Similarly, Xi’s campaign on food security, also heavily promoted in late July, seems to reflect the government’s misgivings over recovery threats.
“In the first half of the year, China’s spring plowing and agricultural production encountered setbacks due to difficulties in transportation, circulation and grain processing,” a Xinhua commentary said.
“Restrictions on food exports and panic hoarding in some countries and regions, and rampant desert locust(s), have adversely affected food production,” Xinhua said.
The warning quickly turned into a “clean plate” campaign aimed at reducing food waste throughout China from agricultural producers to restaurants and schools.
But the sudden escalation of the initiative smacked of an emergency response and austerity measures of the past, contradicting the government’s claims of a speedy economic recovery in the second half.
Last month, the official English-language China Daily cited a glowing report by Ni Yuefeng, minister of the GAC, calling China “the world’s first major economy to witness (a) large recovery of production from coronavirus shock.”
“The ability to survive major shocks and the competitiveness of China’s trade sector keeps rising,” said Ni.
“China’s market share could rise further as the resumption of (global) business continues. It’s remarkable,” Ni said in remarks carried by the Morning Post and Xinhua.
But Derek Scissors, an Asia economist and resident scholar at the American Enterprise Institute, drew opposite conclusions about the divergent trade data and whether China is leading the world in economic recovery.
“August trade data says the global demand recovery is outpacing China’s,” said Scissors.
“China’s economy relies on subsidizing firms at the expense of households. China’s stimulus supports production rather than consumption. The excess supply then gets dumped on the rest of the world,” he said.