China’s economy slowing down in October across the board

• After three quarters growing more than expected, the Chinese economy experienced a broad slowdown in October as most headline indicators have showed. Industry valued added slowed to 6.2% from 6.6% in the preceding month and fixed asset investment also softened to grow 7.3% from 7.5% in September. In particular, heavy and high-polluting industries contributed the most to the drag on fixed asset investment while downstream industries (mainly consumer goods / high-tech products manufacturers) still invest vibrantly.
• On the external front, export and import growth eased to 6.9%YoY and 17.2%, respectively. Look ahead, imports – at least those from US - may not decelerate as much following Trump’s visit as the US administration seeks to reduce the long-standing trade deficits with China. The RMB has somewhat increased its two-way volatility in 2017. As for 2018, we still expect the RMB to face moderate depreciation pressure following the Fed’s monetary policy normalization but the depreciation will be tamed by a cautious PBoC and capital controls remaining in place.
• CPI inflation reached its highest level in 2017 (1.9%YoY in October), partly due to soaring producer prices that transmit inflationary pressure to consumer goods. The expectation of higher inflation and new issuance of sovereign and local government debt add to the deteriorated sentiment in the sovereign bond market, causing the 10Y yield to breach the 4% threshold twice in November. The PBoC injected generous liquidity (CNY 885bn) and also used its first ever 63-day reverse repo in October, reflecting its attempt to stabilize markets in the period when taxation and issuance of government debt drain down liquidity.
• As for investment, the slowdown in October may be related to the high degree of uncertainty prior to the Party Congress. Therefore, as the Party has sorted out the grand plan for the next five years (even up to 2050 in some way), we should expect investment (especially on the private side) to pick up. In addition, as industrial sectors move up the ladder in the process of reducing excess capacity, the economy is also rebalancing towards a more sustainable growth path. Down the road, the slowdown of the economy is unavoidable but we still think it can be achieved at a controlled pace. All in all, we expect the economy to decelerate to 6.5% next year.

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