After a seven-month slump, China’s economy might be at the bottom of its recent slump if economic data continues to surprise to the upside, according to an analyst.

China has had its fair share of ups and downs this year economically.

The world’s second-largest economy kickstarted the year on a high after lifting Covid-19 restrictions early 2023.  This added fuel to the furnace of the Chinese economy, which had a roaring first quarter this year. 

The first quarter was however followed by a slow but steady release of weaker economic data, suggesting dampened demand and a weaker consumer, among other things. This had economic pundits chalking in a possible deflationary spiral in China.

In September, economic data coming out of China seemed a little more promising though.

China’s retail sales figures for August, released on September 16, showed a 4.6% increase from a year prior. This was above the consensus of 3.0% and surpassed July’s 2.5% year-on-year rise. This was its strongest pace of growth since May. 

Meanwhile, China’s industrial production in August managed to beat expectations, which were chalked in at 3.9%, with solid growth of 4.5% compared to a year prior. This was the highest reading since April. 

Diplomatic Network (Asia) chatted to OANDA Senior Market Analyst Kelvin Wong last Friday about whether or not China has seen the worst of its recent economic downturn, and what one might expect in the near future.  

It seems as if China is making a comeback, with recent positive economic data and fears of a deflationary spiral being subdued. What do you think is the case for this? Has China’s economy now seen the bottom? 

There are several key economic data out in August that have suggested a stabilization in the recent 7-month economic downturn in China. Industrial production, retail sales, manufacturing, and services purchasing managers’ indices have managed to beat expectations. 

If the September manufacturing and services PMIs out this weekend continue to show further improvement, there is an increased chance that a bottoming process is in place for China’s economy

The canary in the mine is still the property market where another major property developer cannot start to have another liquidity crunch problem that will likely trigger a systemic risk.  

I recently saw a headline about how fears of Chinese price deflation might have been overblown. Do you think this is the case? What has changed the direction of this spiral?  

The recent pick-up in the consumer price index data for August is more or less driven by an increase in oil prices seen in the past two months; so more data is still required to justify a turnover in deflationary pressures such as demand spending from consumers and businesses in the next two to three months. 

What’s the short to medium-term outlook for China in your opinion?  

In my opinion, the USD strength is also a factor that has a significant impact on China’s risk assets such as equities, if the current major uptrend USD/CNH in place since January 2023 is able to weaken below 7.2330, China equities (CSI 300)  is likely to be able to halt its major downtrend and start to consolidate sideways between 3,500 and 4,030 in the short to medium-term. 

*The Caixin China General Manufacturing PMI released Sunday showed that manufacturing conditions across China improved slightly for the second consecutive month in September. While the Caixin China General Services PMI, released on the same day, showed weakened growth within China’s services industry growth, down to a nine-month low.