Upbeat August Data Suggests PBOC to Leave Rates Unchanged for Longer

The latest set of macroecononmic indicators in China suggests that economic activities surprised to the upside in August. Growth in industrial production accelerated while retail sales gained first the first time since February. Better-than-expected data in August signals that it is less likely for PBOC to cut interest rates.

Industrial production expanded +5.6% y/y in August, beating consensus of +5.1% and July’s +4.8%. In terms of sectors, key growth drivers were equipment manufacturing and high-tech manufacturing which soared +10.8% y/y and +7.6% y/y respectively. Overall manufacturing activities rose +6%, while production and supply of electricity, thermal power, gas and water gained +5.8%. Concerning the services sector, the Index of Services Production climbed +4% y/y in August, up from +3.5% a month ago.

Retail sales returned to growth, expanding +0.5%. This compares to consensus of 0% and July’s -1.1% contraction. Spending on telecommunication products jumped +25.1% y/y. Sales on cosmetics and jewelry also gained +19% y/y and 15.3% y/y, respectively. Catering sales contracted -7% y/y, improving from -11% a month ago. This suggests that the negative impacts of coronavirus outbreak remained.

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Urban fixed asset investment dropped -0.3% y/y in the first 8 months of the year, easing from -1.6% contraction in the first 7 months. Breaking into different categories, manufacturing investment rebounded +6.6% y/y in August, from a -3.2% decline in July. Infrastructure investments expanded +6.7% y/y, easing from +11.8% in July. Growth in property investment accelerated to +12.1% y/y in August from 11.6% in July.

PBOC has kept the one-year medium lending facility (MLF) rate and loan prime rate (LPR), the policy rate, unchanged at 2.95% and 3.85% respectively since April. Over the past months, the central bank has reiterated the stance of targeted monetary policy. With upbeat dataflow in August, we expect PBOC to leave the policy rate unchanged on September 20, as well as in coming months.