China experiences structural slowdown

Developments since Q2 2015 continue to suggest China is experiencing a structural slowdown while facing strong cyclical headwinds. The overarching theme is still the shift away from an investment-led growth model to a service-based one, but it also reflects longterm underlying factors including demographics. 

Cyclical conditions in the short term are dominated by the unwinding of excessive capacities in many sectors, as well as local governments deleveraging and uncertainty in global demand, notes Barclays. In addition, the past summer has been quite eventful with stock market corrections and the FX regime shift associated with strong capital outflows, which complicate the economic outlook and policy setting. 

Starting with economic data, the latest data were softer than expected in general. The Caixin and NBS PMIs touched multi-year lows at 49.7 and 47.3 in August, respectively, suggesting timid demand conditions and low confidence. This has been reflected in sustained contractions in exports and imports, soft IP growth at 6.1% y/y, and lower FAI growth to 10.9% y/y YTD, notes Barclays. 

In particular, the latter was led by bottoming real estate investment (3.5% y/y YTD, a 6-year low) and manufacturing investment, while partially offset by the still-buoyant infrastructure investment. Moreover, despite a strong seasonal bias towards year-end, YTD public spending is far from the annual budget, led by underperforming government-managed fund spending, which also weighs on investment growth.