Recovery reaches pre-pandemic level

CHINA - Report 24 Sep 2020 by FAN Gang and Chunyang Wang

Industrial output was up 5.6% y/y, up 0.8 pps from July, reaching the average growth rate of 2019. We expect growth might slightly exceed the pre-pandemic level for the rest of the year. Investment fell -0.3% y/y January-August, up 1.3 pps from previous months. The driving force is switching from state to private investment, reconfirming the return to pre-pandemic economic recovery.

Consumption was up 0.5% y/y, the first turn to positive growth this year, and up 1.6 pps from July. Exports were up 11.6% y/y, above 10% y/y for two consecutive months. Despite the U.S.-China conflict, exports to the United States grew faster than 20% y/y. Imports fell -0.5% y/y.

CPI growth turned downward in August, and was up 2.4% y/y, falling to the pre-pandemic level. For the next three months, based on the high base numbers of 2019, CPI is expected to fall further. Producer prices continued to rebound. The ex-factory price index of industrial goods fell -2% y/y, and PPI fell -2.5% y/y, up 0.4 and 0.8 pps from July, respectively. But both are still -1.6% and -2.2% y/y lower than in 2019.

The main financial indicators displayed differing patterns in August. M2 was up 10.4% y/y, falling for two consecutive months, and down 0.7 pps from June. M1 rose 8% y/y, up 1.1 pps from July, maintaining its upward trend. The societal financing scale rose 63.1% y/y, mainly driven by large government bond issuance.

The Chinese RMB has strengthened by 2.5% against the dollar in the last four weeks. Cross-border RMB receipts and payments totaled 12.67 trillion yuan, up 36.33% y/y. We expect the RMB will further strengthen in the rest of the year, given the Chinese economy’s much better comeback compared to the United States, the large interest rate differential between the United States and China, and the U.S. dollar flooding into the market. Even though the RMB cannot overtake the dollar in the international market in the near future, the outlook for the RMB is promising.

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