What’s Behind China’s Superbly Strong Month in Car and Retail Sales

A Bentley show room on Beijing Road in central Shanghai. One
BEIJING ROAD, SHANGHAI, CHINA - 2004/04/01: A Bentley show room on Beijing Road in central Shanghai. One Bentley costs 3.6 million RMB (US $435,000). Last year 20 were sold, and they predict another 25 will be sold this year. (Photo by Gerhard Joren/LightRocket via Getty Images)
Gerhard Joren/LightRocket via Getty Images

China posted its strongest retail sales growth of the year in November, while surging steel production lifted factory output, but private investment began to slow again, leaving the economy more reliant on state spending and mounting debt.

After a rocky start to the year, China‘s economy has performed better than expected and looks set to hit Beijing’s 6.5 to 7% growth target as higher government spending and a sizzling housing market fuel a construction boom.

The pickup in China‘s manufacturing sector has helped spur a rebound in global prices of industrial commodities and other goods, adding a welcome reflationary pulse that is slowly being felt around the world.

But one of the Chinese economy’s key growth drivers this year — housing — is showing increasing signs of fatigue.

Growth in home sales slowed to the lowest rate in a year in November as more cities tried to cool red-hot prices, while the pace of new property investment also fell from recent highs. New construction starts rose just 3.3% on-year after climbing 20% in October.

“(The housing market) will continue to cool, and fall to negative growth next year,” said Zhao Yang, chief China economist at Nomura in Hong Kong.

“If the government doesn’t ramp up infrastructure spending, the expected decline in property will certainly drag on growth.”

Property sales growth slid in November to 7.9% from a year ago, its lowest since November 2015, and well short of October’s 26.4% increase.

While overall growth in fixed-asset investment held steady at 8.3% in the first 11 months of the year, the gap between state and private spending highlighted persistent imbalances in the economy.

Investment by private firms slowed in November, reversing a recent recovery from record lows. That is putting more pressure on state firms to pick up the slack and raising fears that this year’s economic momentum will not be sustainable.

Growth of private investment fell to 4.93% on-year in November from 5.9% in October, according to a Reuters calculation, suggesting private firms continue to struggle even as the broader economy gets back on steadier footing.

Indeed, state firms maintained strong spending, boosting investment by 20.2% in Jan-Nov, though the pace slowed slightly from Jan-Oct.

Government spending picked up 12.2% in November after falling in October, China‘s Ministry of Finance said on Tuesday.

In order to meet growth targets, China may increase its budget deficit ratio to 3.5% next year, from a 3% target this year, a senior official at a government think tank said on Tuesday, to accommodate a further rise in government spending.

Top leaders are due to map out their economic and reform agenda for 2017 during an annual Central Economic Work Conference later this month.

Growing debt and property risks have touched off an internal debate about whether China should tolerate slower growth in 2017 to allow more room for painful reforms aimed at reducing industrial overcapacity and indebtedness.


China‘s factory output grew slightly faster than expected in November, with steel output rising the fastest in two years and carmakers cranking up production.

Retail sales climbed 10.8%, the fastest pace since December 2015 and beating expectations for a 10.1% rise, buoyed by gains in auto sales, home appliances and cosmetics.

Auto sales in China surged for a sixth consecutive month in November, an industry association said on Monday, as consumers rushed to buy cars amid uncertainty over whether a tax incentive will be extended beyond the end of the year.

Big luxury brands also reported an improvement in China sales this year after a three-year downturn as Chinese shoppers are spending on luxury goods at home again. Burberry, Gucci-owner Kering, and Tiffany have all reported an uptick in their China earnings.

Part of that is due to the falling value of the yuan, which diminishes the appeal of spending abroad and encourages more domestic spending, said Wang Jianhui, an economist with Capital Securities in Beijing. The yuan has slid to more than 8-year lows against the dollar so far this year.

Other November data showed China‘s imports grew at the fastest pace in more than two years in November, led by commodities from coal to iron ore and copper, while exports also rose unexpectedly, reflecting a pick-up in both domestic and global demand.

However, China‘s trade outlook is being clouded by increasing fears of protectionism as U.S. President-elect Donald Trump prepares to take office.

Trump has threatened to label China a currency manipulator on his first day in office in January, and has threatened to impose huge tariffs on imports of Chinese goods.

Subscribe to Well Adjusted, our newsletter full of simple strategies to work smarter and live better, from the Fortune Well team. Sign up today.