China's economy shows signs of recovery in August as stimulus ramps up

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 growth accelerated to 4.2%, the National Bureau of Statistics said Friday, beating economists’ forecast of a 3.8% increase. Retail sales rose 5.4% from a year earlier, higher than the expected pace of 3.3%, and up from 2.7% in July. The rebound came on the back of a low comparison base last year and remained well below the pre-pandemic levels. 

Fixed-asset investment gained 5.8% in the first eight months of the year, also better than the 5.5% rise projected by economists. The urban jobless rate slid to 5.3% from 5.4% in July. 

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“The economy withstood the impacts of multiple unexpected factors and sustained the momentum of recovery and growth with major indicators showing positive changes,” the NBS said in a statement.

China’s CSI 300 Index of stocks pared some losses after the release of the data but still traded 1% lower as of 10:20 a.m. local time. The offshore yuan weakened 0.1% to 7.0229 per dollar.

Helen Qiao, chief economist for Greater China at BofA Global Research, said the data suggest annual growth may still be able to reach 3.5% this year, although domestic demand remains weak.

“We need to see more policy action to help,” she said in an interview on Bloomberg TV. “In our view, the only policy that will help is to relax the Covid controls.” 

The government and central bank took several steps recently to support the housing and construction industries, seeking to bolster an economy that’s slowed sharply this year. Government spending on infrastructure has also been ramped up and the central bank has cut interest rates to spur growth.

The People’s Bank of China refrained from another interest rate cut this week as the currency comes under pressure. The offshore yuan weakened past the key 7 per dollar level for the first time in more than two years on Thursday.   

Despite signs of improvement, the recovery remains fragile as Covid outbreaks spread to more parts of the country and the government intensifies 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 declined for a 12th consecutive month in August. 

The NBS said there should be effective coordination between Covid controls and economic development, adding that authorities will “focus on expanding effective demand, stabilize employment and prices, solidify the economy’s recovery foundation and keep the economy running within a reasonable range.”

Economists have been downgrading their growth forecasts steadily this year to 3.5%, which would be the second-weakest annual reading in more than four decades and is well below the official target of “around 5.5%” announced in March.

Beijing’s Covid Zero strategy remains the biggest threat to growth, with major cities like Chengdu and Shanghai locked down in recent months to curb outbreaks. Goldman Sachs Group Inc. estimated last week that cities comprising about 37% of gross domestic product were classified as high- or mid-risk for Covid, meaning some of the population in those areas are likely in lockdown or unable to move around freely. 

Tourism has been decimated and travel during the upcoming National Day holidays in October is being discouraged.

(Updates with additional details.)

--With assistance from James Mayger.