SUMMARY. China’s Jul economic data came in a bit disappointing, with manufacturing value-added growth touching historical low, infrastructure FAI decelerating and retail sales dragged severely by car sales. As the economy may not bottom out soon, we expect more counter-cyclical policies to be introduced.
- Manufacturing value-added growth muted. In Jul, industrial value-added increased only 4.8% YoY, dragged mainly by manufacturing. Automobile value-added contracted 4.4% YoY because of consistently weak demand. Output growth of high-tech industries, such as electric machinery, computer, communications and electronic appliances, posted visible deceleration from 1H19. We suspect trade tensions and U.S. ban on Chinese tech firms have inflicted pains on high-tech manufacturing output. However, investment in these industries trended well in Jul.
- FAI – manufacturing stabilized while infrastructure and real estate slid. Overall FAI in Jan-Jul increased 5.7% YoY, 0.1ppt slower than in 1H19. While manufacturing FAI strengthened to grow 3.3% YoY (vs. 3.0% in 1H19), infrastructure growth edged down to 3.8% from 4.1% in 1H19 partly due to hot temperatures and flooding. Real estate FAI slid to 10.6% from 10.9% in 1H19, reflecting plunge in land expenditures. We expect infrastructure FAI to pick up in 4Q and real estate FAI to continue sliding slowly due to financing constraints on housing developers.
- Retail sales weighed on by cars. Car sales declined 2.6% YoY in Jul since the sales boom in Jun overdrew demand in later months, pulling back retail sales growth by 1.2ppt. Ex-car retail sales value would increase 8.8% YoY in Jul and 9.2% YoY in Jan-Jul. Besides cars, sales value of oil-related products also weakened, posting 1.1% decline YoY due to decline of crude oil prices.
- Expect more counter-cyclical measures. The economy is very likely to hover around the bottom for another few months. At appropriate times, we expect the government will introduce more counter-cyclical measures in a pre-emptive way, for example, to initiate investment in areas related to people's livelihood and new infrastructure projects. To ensure healthy job market and keep unemployment rate low is paramount. With respect to monetary policies, we expect the PBoC to adopt targeted RRR cut in Aug or Sep, along with OMO interest rate cuts. Big steps are likely to be taken to merge the two interest rate tracks and make LPR 1) more responsive to market rate movements; and 2) provide more guidance on loan pricing.
