OUTLOOK
Recent macro data indicated slowing economic momentum in August and September. Retail sales growth softened further in August with a moderated impact of the consumer goods trade-in program. FAI YTD growth decelerated sharply, dragged by a larger contraction of private investment as well as a persistently weak property sector. That said, we noted signs of the positive impact of ongoing “anti-involution” campaign, for example, PPI gains in upstream sectors such as mining and quarrying, and ferrous metal smelting & pressing for August. Since the beginning of September, policies focusing on capacity management have been issued for industries including photovoltaics, steel, building materials, petrochemicals, some nonferrous metals industries, coal-fired power; whereas, several new policies were issued too in support for the development of new technologies and sectors focusing on national safety. Overall, anti-involution likely generates a restraining impact on production capacity and weighs on economic growth. To stabilize growth, the Chinese economy needs more policy support. Recently, the government announced a plan to inject RMB 500bn funding (about 1% of 2024 FAI) to replenish project capital through a “new policy-based financial tool”, with which the local governments are urged to speed up the project construction. The measures to “Strengthen the cultivation of innovative digital economy enterprises” were also announced which includes lowering the barrier to access computing power, strengthening support for digital innovative firms on IPO fundraising. Lastly, Ministry of Commerce and eight other departments also jointly issued a guideline on developing digital consumption.
Despite weak economic fundamentals, the equity market has remained upbeat since early April, due to positive sentiment towards the prospect of AI development and anti-involution. We maintain an appreciation bias for CNY due to the positive sentiment in the near-term, as the fourth plenum of the 20th CCCPC will run from 20th – 23rd October when the 15th five-year plan will be discussed. We may gain some clarity on details of reform measures. While seeing room for positive policy surprises, we cannot ignore the possibility of negative shocks. According to South China Morning Post, China has revised its international maritime transport rules to allow retaliatory measures, including charging special fees or restricting access to Chinese ports. This adds a variable to current US-China trade talks.