China’s domestic demand remains weak despite manufacturing sector rebound

Key indicators for July show uneven economic growth mainly due to an imbalance between strong manufacturing output and weak domestic demand

By CCB International

China’s National Bureau of Statistics recently released economic data for July, saying that China has, on the whole, achieved stable performance while also securing progress in its economic development for the month. However, the latest research from CCB International points out that certain indicators require special attention.

China’s economic data for July showed an uneven economic recovery mainly due to the imbalance between strong manufacturing output and weak domestic demand. Industrial production growth remained solid but was still slightly weaker than the second quarter amid new global manufacturing trends, industrial upgrades and green transformation. The development is in line with ongoing manufacturing upgrades both at home and abroad.

The country’s manufacturing investment grew by 8.3% year-on-year last month, fueled mainly by industrial upgrading and high-tech related sectors. In particular, investment in high-tech sectors such as computing, telecommunication and other electronics recorded strong growth of up to 10%. Meanwhile, investment in non-ferrous metals and general and specialized equipment also grew by double digits in July.

However, infrastructure investment growth slowed to 5.6% during the month, mainly due to a slowdown to a mere 2% in growth for spending on traditional infrastructure investments like roads and railroads, sectors highly dependent on government finances. Infrastructure investments related to the green transition bucked that trend, growing robustly by up to 21.1%.

Meanwhile, retail sales growth rose slightly to 2.7% in July, a bit higher than market expectation for 2.6% and registering a 0.4% month-on-month rebound from a 0.1% contraction in June after seasonal adjustment. But that growth, compared to double-digit rates often seen in the past, still reflects weak consumption demand. As the consumption downgrade marches on, more policy measures and reforms are obviously needed to counter cyclical headwinds. Nevertheless, the nation’s online sales grew 7.9% year-on-year last month, accounting for about a quarter of total retail sales, becoming a major pillar for domestic demand.

We should note that the Consumer Price Index (CPI) rose 0.5% year-on-year in July, notably higher than the 0.1% average in the first half of 2024, mainly due to food price hikes. In particular, the price of meat, led by pork, rose 0.4% year-on-year in July. High-frequency data shows that the rise in food prices extended into early August, which may continue to push up CPI.

Macro policy may remain accommodative

The housing market, meanwhile, is showing some signs of stabilization. From January to July this year, sales area and volume of new homes sold nationwide decreased by 18.6% and 24.3% year-on-year, respectively, a slight improvement from the 19% and 25% declines in the January- to-June period. New home prices in 70 cities also fell by 0.65% month-on-month, marking a slight 0.03 percentage point improvement from June. Second-hand home prices fell by 0.8% month-on-month, also improving by 0.05 percentage points from June.

National mortgage loans have maintained low single-digit growth since the fourth quarter of 2023. That slow growth still indicates some pressure on household finances. However, as housing inventories remain high, policies are likely to focus on adjustments on the supply side of housing inventories, which may accelerate the overall pace of adjustment in the housing market.

As projected by CCB International, fixed asset investment grew only 1.9% year-on-year in July, representing some of the slowest growth in the past five years. While manufacturing investment performed well, real estate investment and traditional government-led infrastructure investment dampened overall investment growth. The contraction in real estate investment, among others, continued to ease in July, improving to 10.8% year-on-year. The contraction in real estate investment is expected to continue, given weak property sales in recent months.

CCB International believes that macro policy is likely to remain accommodative in the current economic climate. The country’s fiscal spending is expected to increase in the second half of the year to make up for lackluster spending in the first half, as the need for policy to boost support for demand was highlighted at China’s politburo meeting in July. As a result, liquidity will remain accommodative in the second half of the year, even as the recent rebound in food prices may limit the easing in the near term.

This commentary is the views of the writer and does not necessarily reflect the views of Bamboo Works

To subscribe to Bamboo Works free weekly newsletter, click here