China's Industrial Growth Stabilises, Supported by Coastal Exporting Hubs

Coastal China Leads Rebound, Supported by Buoyant Exports

China's overall industrial production growth rebounded to 13.9% in year-on-year (y/y) terms in August, the first uptick recorded since April, when the downward trajectory started with the introduction of domestic macro controls. The rebound was mainly supported by coastal economies, and to a lesser degree by central regions. Coastal China posted an average y/y growth of 16.9% in August, a marked acceleration from the 15.9% y/y expansion recorded in July. The magnitude of acceleration is larger than the 0.6-percentage-point acceleration reported by central Chinese regions, although coastal China is still behind central regions in terms of growth rate.

Coastal regions' growth has been apparently supported by a robust exports sector that has been doing better than expected over the past two months. In Guangdong, the largest exporting province of China that accounts for nearly 30% of the country's exports so far this year, foreign trade hit a record monthly level in August, bolstered by a marked accelerated in export growth. Exports expanded by 34.7% in y/y terms in August, accelerating from a 28.3% y/y gain in July and marking the first time this year for export expansion in the province to outpace that in China. Other major coastal exporting provinces have also reported strong exports growth. Jiangsu recorded a 41.9% y/y increase in exports in the first eight months, and Zhejiang reported 39.4% y/y growth, both running ahead of the national average.

Western Regions Lag with Crackdown on Energy-Intensive Industries

With the rebound in coastal and central regions, the country's most underdeveloped western regions, or tier three provinces, still stayed on a downward trajectory, with growth sliding to 13% on the year in August, from 14.1% y/y in July, despite the broad-based rebound in other parts of the country. Indeed, western regions, heavily based on resource and heavy industries, have seen the most drastic output slowdown so far this year in China, with industrial production growth falling by nearly 12 percentage points from the peak in April, compared with about 4 percentage points in coastal China and nearly 6 percentage points in central China.

While the slowdown is broad-based in western regions, it was led by a few regions that are facing much greater challenges for energy-intensity cuts. Guizhou province recorded the sharpest deceleration, from a double-digit 13% y/y growth in July to only a 4.3% y/y increase in August. Ningxia and Guangxi also recorded marked deceleration, by nearly 4 percentage points from a month ago. The more dramatic slowdown could have been triggered by a more aggressive crackdown on energy-intensive industries in those regions, as Ningxia and Guangxi are two of the seven Chinese regions that had seen their energy intensity increase in the first half. Guizhou is also one of the regions that are most behind schedule in fulfilling the energy efficiency targets for the 11th five-year plan period.

Outlook and Implications

While Chinese regions have basically followed a similar trajectory of growth overall, there are some divergences across the regions, mainly reflecting differences in local economic structure, sources of demand and therefore differences with respect to their sensitivity towards domestic macro controls. Western China, which has benefited the most from the government's stimulus package last year, has also been the first to feel the impact of the macro controls on housing market and on energy-intensive sectors as local economies there are deeply anchored to resource and energy-intensive heavy industrial sectors. Coastal regions, on the other hand, stand on the other end of the industry mix, with a heavy focus on downstream industrial sectors that are tied up more closely with external demand than domestic demand. With such an attribute, coastal economies have demonstrated much greater resilience in this round of output correction, as the slowdown started since April had been mainly induced by domestic factors.

Going forward, western regions are likely to continue to underperform in the remainder of this year, as the macro control on energy-intensive sectors has actually been ramped up quite a bit from September as China starts counting down for the final review of the energy-efficiency improvement results for the 11th five-year plan period that ends this year. In the meantime, coastal regions could well see their lead over inland regions narrow to a certain extent, as exports growth is projected to slow down over time and a couple of coastal regions, such as Liaoning and Jiangsu, are also under huge pressures for energy-intensity cuts.