Yuan, CSI caned as China property crisis deepens

The deepening property crisis took all the gloss off China’s better than expected data for production, retail sales and investment in August.

The improved data didn’t fool sharemarket investors on Friday – the CSI 300, China’s key blue-chip index, slid more than 2% and the yuan ended at a 27-month low against the US dollar because the property slide worsened for yet another month.

That was despite China reporting faster-than-expected growth in industrial production, investment and retail sales last month which appeared to boost the recovery from the effects of COVID and drought.

But the extent of the improvement was made to look better by weak figures a year ago as the country saw an outbreak of Covid, plus the start of rolling power rationing and blackouts due to a shortage of coal and electricity which all saw production, investment and retail sales soften.

Retail sales grew 5.4% in August from a year earlier, the fastest pace in six months, while industrial production rose 4.2% and fixed-asset investment grew 5.8%, all exceeding expectations.

The deepening property slump again underlined the central policy problem for President Xi a month out for his almost certain appointment as President for a third term.

When combined with the hardline approach to controlling Covid and the gathering downturn in Europe in coming months, it’s clear China’s economy will continue to splutter.

The weak base effects from a year earlier played a substantial role in the solid retail sales numbers and the better than forecast investment and production, according to Pantheon Macroeconomics chief China economist Craig Botham, who said they will likely slow in September.

“This is due to a lower base for comparison – the Delta wave was weighing on economic activity in August 2021,” Capital Economics’ Julian Evans-Pritchard said in agreement.

“While the current virus wave may have peaked, activity is set to remain weak over the coming months amid the deepening property downturn, softening exports and recurring Covid-19 disruptions,” said Evans-Pritchard.

Although the upbeat data lifts some of the gloom hanging over the sluggish recovery, which had been clouded by weak trade data and slow credit growth, Evans-Pritchard does not expect the strength to sustain into September.

And while the current virus wave may have peaked, activity is set to remain weak over the coming months amid the deepening property downturn, softening exports and recurring COVID-19 disruptions,” he said.

Fixed asset investment grew 5.8% in the first eight months of 2022 from the same period a year earlier, above a forecast 5.5% rise and up from January-July’s growth of 5.7%.

Despite the positive signs, the economy remains sluggish and the National Bureau of Statistics said in a statement that the foundation of recovery “is not solid.”

The benchmark CSI 300 stock index fell 2.35% on Friday to be down nearly 3% last week. The yuan plunged past seven to the dollar to end at 7.01, the lowest since July 2020.

But the big news was the continuing slump in property – despite more efforts by some western analysts to claim the problem isn’t that serious.

August saw falls in home prices, investment and sales as a mortgage boycott, widespread Covid-19 lockdowns and a weak economy clouded confidence in the sector.

New home prices fell 0.3% month-on-month in August, the fastest pace since November 2021, according to Reuters (0.29% by Macquarie). That was after prices remained steady in July.

New home prices fell 1.3% year-on-year in August, the fastest pace since August 2015, extending a 0.9% decline in July.

Property investment fell 7.4% year-on-year in January-August, the fastest pace since January-March 2020, extending the 6.4% drop in January-July, according to the NBS.

Property sales by floor area fell 23.0% from a year earlier in the first eight months of the year, after a 23.1% slump in the first seven months, reflecting weakening demand.

Investment in real estate continued to contract – down by 13.8% year on year in August. Residential construction starts fell by over 47% year on year in August as a steep correction continues in the sector. Sales fell 27.9%.

The mortgage boycott across the country since late June splutters on as developers stopped building presold housing projects due to strapped liquidity and strict Covid-19 restrictions.

As of last week, 51 cities, accounting for 26.1% of China’s gross domestic product (GDP), were implementing full or partial lockdowns or some kind of district-based control measures, said Nomura in a research note late last week.

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