China: Signs of stabilisation on decisive stimulus. Resilient external trade stayed as a bright spot in October. Exports growth increased from 2.4% y/y in September to 12.7%, resulting in a 5.1% y/y growth YTD. Major products such as high-tech products, electronics, and automobiles recorded a YTD improvement during the month. Aligned with the uptick of exports shipments, both SME exporter-focused Caixin and official manufacturing PMI also rebounded back to expansion territories in October.

Chinese exporters face several risks, in particular, elevated trade tension as the new US administration will likely raise further tariffs against China. However, the actual impact may be less severe as the tariffs are being implemented in phases and the tariffs that are implemented on other countries will dilute the effect on China. Burgeoning demand from emerging markets and domestic stimulus could partly offset the loss of trade income from the US. Furthermore, there might be front loading of export orders as seen during Trump’s first term. keeping export from China to the US resilient. 

Retail sales growth accelerated from 3.3% y/y in the first nine months to 3.5% YTD in October as consumption sentiment saw signs of stabilising due to the stimulus measures. Spending on leisure, cosmetics, and household electronics surged by 26.7% , 40.1%, and 39.2% y/y respectively. However, a negative wealth effect from asset markets continues to dampen consumption sentiment with sales of big-ticket items, luxuries, and construction materials declining further. Hopefully, the CNY300bn consumption upgrade subsidy, equivalent to 0.6% of retail sales, will cushion the downtrend.

Persistently weak aggregate demand indicates the need for further loosening of monetary policy. This is evidenced by the 6.1% y/y contraction in M1 in October. Meanwhile, M2 growth rebounded from an all-time low of 6.2% y/y in June to 7.5%. The gap between short-term M1 and time deposit M2 growth widened to 13.6 %pts, hovering around its highest level since May 2012. This implies households and corporations are reluctant to hold liquid cash for consumption and investment. However, it is worth noting, both M1 and M2 growth show early signs of bottoming out as a result of ongoing stimulus.

Strong stimulus measures, from rate cuts to public outlays, have been the hallmark of China’s policy stance since September. This ought to help the economy maintain 5.0% growth in 2024 and 2025, though China's economy will continue facing risks from property market to strained local government finance due to persistently weak aggregate demand and a very likely escalation of trade and tech war. We see room for a 10 bps 1Y LPR cut in this quarter and another 50 bps cut in 2025.

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