China's economy is 'walking a tightrope' as key data signals remain mixed

(Scott Barbour / Getty Images)
  • Key data out of China today showed retail sales and industrial production beat forecasts, but fixed asset investment fell to a new record low.
  • Commsec’s Ryan Felsman pointed out that jewelry sales rose strongly – a sign that consumer confidence remains high.
  • Felsman said investors should also keep an eye on new initiatives by Chinese policy makers to try and spur fixed asset investment.

The data deluge out of China today was a mixed bag.

Retail sales and industrial production both beat expectations, but growth in fixed asset investment fell to a record low of 5.2% for the eight months to August.

As Commsec senior economist Ryan Felsman highlighted, “China is Australia’s largest trading partner, so economic activity in the world’s second largest economy matters”.

Markets are keep a closer eye on key trends, to try and gauge the extent to which ongoing trade tensions with the US are having on China’s economic performance.

In view of that, the August prints for retail sales (+9% y/y, against 8.8% forecast) and industrial production (+6.1%, 6.0 forecast) were both positive.

And within the headline figures, Felsman picked out an interesting trend in Chinese retail.

“Gold, silver and jewellery sales rose by 14.1 per cent in the year to August, up from 8.2 per cent in July – the second strongest sales in three years,” Felsman said.

Even adjusted for inflation, which continued to rise in August, retail sales growth still increased over the year.

And Felsman highlighted the jewelry sales as a reflection of the continuing shift underway in China’s economy, as it transitions towards a focus on domestic consumption.

“It’s little wonder that luxury US jeweller, Tiffany’s, reported strong results recently with sales surging 28 per cent in Greater China over the June fiscal year.”

But elsewhere, the indicators weren’t so positive.

Felsman said the Chinese economy is “walking a tightrope,” as policy makers try to reduce leverage without curtailing economic growth while the US trade threats lingers in the background.

The reduction in credit growth has coincided with a slowdown in fixed asset investment, which fell to a record low in August:

However, Felsman said a number of new policies have been announced which should help to boost activity, such as special bonds for infrastructure investment.

And these developments “are yet to feed through to the data,” he said.

“Investors should watch for more initiatives from Chinese authorities to stimulate activity,” Felsman said.

“A more proactive fiscal policy is favoured, as Chinese authorities attempt to strike a balance between easing and tightening and keeping liquidity “reasonable and sufficient.”

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