China’s economy shows signs of recovery, but still suffers from housing crisis; iron ore falls in Dalian

China’s economy showed surprising resilience in August, with stronger-than-expected growth in industrial production and retail sales reinforcing a fragile recovery. On the other hand, an ever-increasing downturn in the real estate sector detracted from the outlook and impacted the metallic commodity market.

The figures show that the world’s second-largest economy is gaining steam after narrowly escaping a contraction in the June quarter and marginally raising prospects for a recovery for the rest of the year.

Industrial production rose 4.2% in August from a year earlier, the biggest increase since March, according to the national statistics office. That beat a 3.8% increase expected by analysts in a Reuters poll and a 3.8% expansion in July.

Retail sales rose 5.4% from a year earlier, the biggest increase in six months and also beating forecasts for a 3.5% growth and a 2.7% gain in July.

“This is due to a lower baseline — the Delta wave was weighing on economic activity in August 2021,” said Julian Evans-Pritchard, Chinese economist at Capital Economics.

While the upbeat data eases some of the gloom over the slow recovery, which has been overshadowed by weak trade data and sluggish credit growth, Evans-Pritchard does not expect the strength to hold in September.

“And while the current virus wave may have peaked, activity is expected to remain weak in the coming months amid a deepening housing slowdown, declining exports and recurring Covid-19 disruptions,” he said.

The auto industry was a major driver of both industrial production and retail sales, with production of vehicles powered by new energy sources growing by 117%, aided by government incentives for cleaner cars.

However, outages at several state oil refineries and independent facilities and reduction margins have kept oil production near two-year lows. Daily coal production also fell to the lowest level in three months.

real estate sector suffers

In addition, in August, real estate investment in the world’s biggest steel producer fell at the fastest pace since December 2021, according to Reuters calculations based on official data. New home prices fell 1.3% from a year ago, the fastest pace since August 2015.

As a result, the most traded iron ore for January on China’s Dalian Commodity Exchange ended trading down 1.2% at 715 yuan ($101.89) a tonne.

On the Singapore Stock Exchange, the benchmark steel ingredient contract for October fell 2.6% to $98.05 a tonne, trading below $100 for the first time this week.

The data ultimately undermined market confidence that had underpinned China’s ferrous complex in recent days, with increased government support for the struggling real estate sector and hopes for further policy action to bolster the economy.

Policymakers in China have announced more than 50 economic support measures since late May and last week stressed that this quarter was a critical time for policy change.

“The anticipated ‘September of gold, October of silver’ is yet to be seen,” analysts at JPMorgan said in a note, referring to the seasonal rebound in construction activity and housing demand in China.

Analysts expect the impacts of Covid-19 on business activities in China will keep investors cautious.

So traders largely ignored China’s faster-than-expected growth in industrial production and retail sales in August. Rebar on the Shanghai Futures Exchange SRBcv1 was down 1.6%, hot-rolled coil was down 1.3% and stainless steel was down 1.9%.

Swiss bank Julius Baer points out that indicators related to the real estate market, such as land sales, new home sales and newly started construction, also show that activity in the real estate sector remains in deep contraction, suggesting that the real estate sector remains a large obstacle to economic recovery.

There are a growing number of Chinese cities relaxing home purchase restrictions, but it remains to be seen whether these measures can give a tangible boost to home sales, given weak confidence in the housing market and consumer concerns about their income and job security. , assesses the bank’s economic analysis team.

“Despite signs of improvement in recent data, especially in areas more supported by public policies, the economic recovery remains fragile. The road ahead is likely to remain bumpy as the housing market downturn and strict Covid-19 management to contain the spread of Covid-19 outbreaks weigh on the economy. Markets also don’t seem to be convinced that the latest data is a sign of a major turnaround in the Chinese economy.

(with Reuters)

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