China's economic recovery wobbles as drought and global slowdown add to risks

The property market slump extended into August, with sales continuing to plunge in China's four top cities. PHOTO: AFP

BEIJING (BLOOMBERG) - China's economy continued to recover in August but warning signs are flashing across a number of fronts as weaker global demand and a crippling drought exacerbated by a record heatwave add new risks to growth prospects.

That is the outlook based on Bloomberg's aggregate index of eight early indicators for this month. The overall gauge was at five, unchanged from July, signalling that momentum has steadied.

Strong overseas demand for Chinese goods, which has helped to offset some of the damage from Covid-19 lockdowns on domestic spending, weakened sharply in August. South Korean exports, a leading indicator for global trade, barely grew in the first 20 days of this month from a year earlier.

The 0.5 per cent increase in South Korea's average daily shipments was the weakest since late 2020 and was a marked slowdown from the 14.5 per cent rise in the same period last month.

A slump in Hong Kong's July exports also showed how a cooling global economy, worldwide interest rate hikes and Covid-19 disruptions are affecting demand.

For China's domestic economy, the picture is not rosy either. The property market slump extended into August, with sales continuing to plunge in China's four top cities. This is despite months of efforts by the government to boost lending to home buyers, lower mortgages rates and allow more flexibility for down payments.

The latest official data showed that property loans in July grew at the weakest rate since comparable data began in 2012. Mortgage rates will likely continue to be cut to a record low of 4.1 per cent after banks reduced their five-year loan prime rate by 15 basis points earlier this week to boost housing demand.

Growth in car sales was also much slower than in July, another indication of weak domestic demand. Premier Li Keqiang promised last week to maintain preferential policies that are designed to boost sales and stimulate demand for cleaner cars as part of efforts to support the development of the electric vehicle industry.

New economic headwinds this month, including a power crunch and Covid-19 flare-ups, have hurt business confidence, especially among smaller firms. Standard Chartered Bank's survey of more than 500 smaller companies showed that confidence slipped in August as production activity "slowed significantly", new orders weakened and bank financing costs picked up.

"Ongoing Covid-19-led disruption and power-rationing measures imposed in some key production areas, including Sichuan, resulted in temporary factory shutdowns," StanChart economists Hunter Chan and Ding Shuang wrote in a report.

"The disruption in production and sales resulted in a faster increase in raw material inventories and finished goods prices."

Covid-19 outbreaks continued to derail what is usually the peak season at some of China's top summer hot spots. The seaside city of Beihai only recently emerged from a month-long lockdown. More than 100,000 tourists were trapped on the tropical island of Hainan because of outbreaks there, while Tibet had tens of thousands of tourists stranded in the region due to cancelled flights and roadblocks to contain infections.

A power shortage from the drought and heatwave has forced factories to shut down and shopping malls to turn off lights, especially in cities in western China. Although the economic damage is expected to be smaller than from power shortages last year, economists still expect industrial output to be hit in August.

Policymakers on Wednesday (Aug 24) stepped up their economic stimulus with a further 1 trillion yuan (S$202.8 billion) of funding largely focused on infrastructure spending. However, economists were relatively downbeat on the measures, saying these will likely not go far enough to counter the damage from repeated Covid-19 lockdowns and the property market slump.

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