Editor’s note: Jimmy Zhu is the chief strategist at Fullerton Research. The article reflects the author’s opinions and not necessarily the views of CGTN.
China’s economic trajectory showed encouraging signs of acceleration in August, boosted by robust growth in both manufacturing and consumption, which followed effective stimulus measures. This positive development indicates the gradual dissolution of significant obstacles and instills confidence for the future.
Industrial production posted a notable 4.5 percent rise in August, surpassing the previous month’s 3.7 percent increase.
Over the years, China’s industrial production has remained a vital catalyst for economic expansion, resulting in amplified output, increased employment opportunities and improved living standards. This sector serves as a prominent barometer of the overall health and momentum of the economy, and the observed rebound demonstrates a promising trajectory towards economic recovery.
In an effort to breathe life into the economy, the government has implemented a wide range of measures, including support for the private sector, tax cuts, monetary easing and selected mortgage rate cuts.
The rebound in industrial production effectively validates the effectiveness of these initiatives, reinforcing the belief that the economy may have passed its nadir while providing a solid foundation for future growth.
Remarkably, the resurgence in industrial output also points to a resurgence in regional supply chains. The August performance data prompted a broad rally in Asian stock markets. Given China’s key role in the global supply chain, an increase in industrial production signals a stabilization in factory activity, particularly for businesses that rely on Chinese manufacturing and sourcing.
Another creditable surprise from the recent data was the 4.6 percent year-on-year increase in retail sales during August, which beat July’s 2.5 percent rise.
The upward trend in retail sales is a major indicator of improving consumer confidence in China. When consumers show a greater willingness to spend on retail products, it reflects both optimism about the economy’s trajectory and personal finances.
Elevated retail sales are a sign that consumers are feeling more comfortable about their financial situation and the general state of the economy. When individuals have faith in their financial stability, they are more likely to indulge in discretionary purchases, such as retail products.
In addition, the surge in retail sales points to higher disposable incomes available for spending. The presence of surplus income, in addition to meeting basic needs, encourages an inclination toward discretionary purchases.
China has experienced a notable transition toward a consumption-driven economy, empowered by the rise of its middle class and the ongoing process of urbanization. Evolving consumer attitudes and lifestyles have created a burgeoning demand for retail products and experiences.
In recent months, the government has introduced numerous measures aimed at stimulating domestic activity. The increase in retail sales is an encouraging sign that these policies have positively affected consumer behavior. The perception of government policies as effective has driven a cycle of economic growth and boosted the performance of the retail sector.
Positive perceptions also attract increased investment, as investors are more inclined to allocate capital when they witness tangible evidence of the efficacy of government measures. That, in turn, boosts economic activity, further boosting retail sales. When consumers trust government policies to enhance their financial well-being, they feel safe and comfortable spending their money.
The perception of policy effectiveness has considerable sway over business and market expectations. When businesses have confidence in the efficacy of government policies, they are more likely to invest in expanding their operations, launching new products and expanding their workforce.
More international inflows are expected amid policy differences with the West
The divergence in monetary policies between China and Western economies has opened the door for increased international capital flows.
On September 14, the People’s Bank of China announced a 25 basis point reduction in the cash reserve requirements for banks.
In addition, the central bank injected a net 191 billion yuan ($26.3 billion) into the financial system through one-year policy loans and an additional 34 billion yuan ($4.7 billion) through 14-day money market loans. The moves have fueled expectations of more monetary measures to come.
Access to affordable credit provides crucial support for businesses to expand their operations, launch new projects and drive consumption, thus attracting greater capital into China’s capital markets.
Relaxed monetary conditions have fostered improved liquidity within the Chinese market, ensuring greater availability of funds for investment and trading activities. This enhanced liquidity, coupled with increased investor confidence, has made China’s capital market an attractive prospect for both domestic and international investors.
The divergence in interest rates between China and Western economies has contributed to the yield differential, making China’s capital markets relatively more attractive to investors seeking higher returns.
When interest rates in Western economies are relatively higher due to efforts to combat inflation, investors seeking higher returns tend to explore investment opportunities in China’s capital markets, which offer relatively more opportunities. This pursuit of higher yields has spurred capital inflows into China, further strengthening its position as an investment destination.
Looking ahead, the attractiveness of China’s capital market to foreign investors depends on various factors. These include China’s overall economic situation, policy stability, regulatory environment and market sentiment.
Encouragingly, recent Chinese economic data, macro policies and market sentiment have aligned favorably, sparking interest from international investors and fostering a positive outlook for China’s capital markets.