Persisted Slowdown
- This is not something new, China’s economy has entered a slowdown phase since Nov 2024 with below forecast retail sales and slowing industrial output growth in August. The PMI slightly recovered to 50.5 in August, compared to July’s 49.5.
- Lacks domestic demand is supported by the negative CPI (-0.4% MoM) and low PPI (0.1% MoM) in August.
- At Cordoba, we see the slowdown will continue to early 2026. Beijing is unlikely to shift the loss of export from US tariff to internal demand in the near term to boost economy.
Stagnated Domestic Demand
- Although the retail sales rose 3.4% YoY in August, it is below the analysts’ 3.9% forecast and July’s 3.7%. The Industrial output grew 5.2% in August, less than the 5.7% growth in July.
- The lack of demand is partly driven by a persistent slowdown in the property market in the past few years. Beijing released a series of stimulus plans, including childcare subsidies for families, subsidised consumer loans, and reducing industrial capacity. But most policies are targeting at a medium to long-term horizon, with limited short-term impact.
Unstoppable Military Power
- Recent Chinese military parade on Sept 3rd in Beijing did show Xi’s frenetic diplomacy style.
- China has indeed built up a strong army over the past decade under Xi’s leadership. Xi’s anti-corruption campaigns in the 2012 to 2014, on the one hand, cleared out factions of his opponent in the military. On the other hand, it had made military redirects its focus onto modern warfare, including hypersonic ballistic missile, areo-drone, and cyberwarfare.
- Military power put more cards on the table when you are doing a trade talk with US. However, Beijing’s power is spreading thin with its increasing ambition. The Chinese government national debt was over 80% of GDP in 2023, with higher oversee spending on the Belt and Road Initiative, and 1.25% military spending/GDP ratio in 2024. The debt level is alarmingly high, another debt swap plan for the local government on the municipal bond is costly and impractical.
Deepening Demographic Crisis
- China has launched its first nationwide childcare subsidy, offering families Rmb3,600 (about $500) annually for each child under three, in a bid to ease the financial burden of parenting and counter falling birth rates. The policy, set to benefit over 20 million families from 2025, may boost the population in the long run.
- The China’s population pyramid is showing a fatter bottom tail at the elder age group in 2024 compared to a relatively young workforce in 2004. To address rising longevity risk, Beijing has introduced a mandatory social benefit scheme requiring all employers, in both the public and private sectors, to contribute a proportion of employee paycheck to an employee’s social benefit account. This act will further shrink down the business profit margin and may shrink production in the near term.
Bottom Line
At Cordoba, we expect the China’s central bank rate remain low and close to the zero bound. We remain cautious on all investment in China in the short and medium horizon.
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