China’s economy showed signs of recovery in August as Beijing rolled out stimulus measures to counter a slowdown, although a property market slump and Covid outbreaks continue to weigh on the outlook.

Industrial production, retail sales and fixed-asset investment all grew faster than economists expected last month. The urban jobless rate slid to 5.3%, while the youth unemployment rate fell from a record high.

The boost to retail sales was partly due to a lower base of comparison from a year earlier and a surge in car sales after Beijing gave buyers subsidies on electric vehicles. Industrial output was also supported by a big spike in electricity production during August’s heatwave, a rebound that’s unlikely to be sustained. 

Despite signs of improvement, the recovery remains fragile as Covid outbreaks spread to more parts of the country and the government tightens curbs to contain infections in the run-up to the Communist Party’s twice-in-a-decade leadership congress next month. A property market slump also shows no sign of easing, with separate data on Friday showing home prices have now declined every month in the past year, with the contraction in August bigger than in July. 

“While today’s data are better than expected, it’s unlikely to change the prevailing pessimism toward China, given the multiple headwinds underway including zero-Covid, property rout and the lack of decisive policy moves before the Party Congress,” said Larry Hu, chief China economist at Macquarie Group Inc. 

Eoin Treacy's view

China’s administration knows better than anyone that a property crash would represent an existential crisis for social cohesion. At the same time, they don’t want to allow a bubble to expand any further and have been trying to stamp out speculation. The conflict arises in the fact you can’t have a bull market without people willing to take risks. Building in the hopes of selling at a profit is speculative by nature.

China does not have a property tax. Without another way to fund local governments, the land sale – property developer – banking sector tripartite system will be impossible to void. That’s why Chinese investors have always been willing to buy any dip in property prices. Covid-zero policies have dampened animal systems so the government has no choice but to lend support.

That comes at the expense of a strong currency. The Renminbi has been selling off over the last month and is now testing at the psychological CNY7 level. A short-term oversold condition is evident so there is scope for some consolidation, but the bigger picture is China cannot both spend money on supporting the economy and simultaneously support the currency.

The CSI300 continues to trend lower and posted a new reaction low today. A clear upward dynamic will be required to check the slide.

The Hang Seng China Enterprises Index is also continuing to trend lower.