By LIU Lin

China’s economy slowed in October, with exports and retail sales both down, and the manufacturing sector sending a mixed message. 

Retail sales dropped for the first time in five months by 0.5 percent from a year ago. Urban consumer spending shrank 0.6 percent. Rural spending kept growing but at a slower pace than in September. 

The drop in restaurant revenue widened to 8.1 percent from September’s 1.7 percent. Sales of goods fared better than services, scoring a 0.5 percent increase. Spending on food and medicine maintained above 8 percent growth, while non-essential goods, such as cars, clothes and home appliances, either sold less or grew slower than in September.

Forecasts for the rest of the year depend very much on the Covid situation. Consumption is not likely to bounce right back during the winter, but the easing of Covid controls has given the market and consumers some renewed confidence. When China eased restrictions, the stock market and yuan rallied.

Fixed asset investment for the first ten months of the year grew by 5.8 percent, slightly below the 5.9 percent cumulative growth as of September but still higher than from 2018 to 2020. This was mainly driven by infrastructure building and manufacturing investment, which grew 11.4 percent and 9.7 percent respectively. Real estate development, on the other hand, shrank 8.8 percent from January to October.

There are concerns about whether infrastructure and manufacturing can keep up the momentum for the rest of the year. The government can’t just keep approving new projects, and corporate loans, underwritten by local banks with the central bank as the ultimate lender. There is a risk of tipping the balance of the financial system loans ballooning at the current pace. 

Manufacturing profits declined 13.2 percent from January to September this year, with margins dropping below pre-pandemic levels. Some companies have decided to stay away from risk altogether. Bank deposit increased by 16.6 percent in October and is at the highest level since 2015. 

The investment segment is not likely to shake off the pressure of Covid any time soon. The recovery of investment depends not only on the entrepreneurs’ view, but on government support.

Industry value added increased by 0.33 percent in October from the previous month, the lowest since May. Year-over-year growth slowed to 5 percent. 

Exports dropped for the first time since 2020 after having decelerated for two months straight. Demand will remain weak, as the rest of the world grapples with high inflation, high interest rates, and high energy bills. 

While Covid control measures on manufacturing and logistics have eased, it is only too soon to look into the future through rose-colored glasses, for sporadic Covid outbreaks could shortly disrupt labor mobility and material flow. The coming winter will be a vital transition period for the economy as it regains strength.