Commentary on China's October domestic economic data: Why did consumption jump?

October economic data shows further increase in structural highlights of the economy In October, the year-on-year growth rate of industrial added value was 5.3% (compared to 5.4% in September), and the year-on-year growth rate of the service sector production index rose to 6.3% (compared to 5.1% in September). The warming up of the service sector significantly boosted the economic growth rate this month. Third-quarter economic data shows a significant decrease in the drag of the real estate sector on the economy from an unchanged price perspective, a significant increase in the pull of the financial sector on the economy, and a marginal increase in the contribution of industries such as wholesale and retail, accommodation and catering, and leasing to GDP. Overall, the above characteristics are still evident in the October economic data. However, the October economic data also reflects the differentiation in strength among sub-items 1) Driven by trade policy uncertainties, the "rush to export" sentiment led to a significant increase in export growth rate, further boosting overall economic support. 2) The investment growth rate in fixed assets in October remained stable, with infrastructure investment returning to a reasonable growth range but still positive, and manufacturing investment slightly improving. 3) Real estate development investment in the month saw a significant decline in year-on-year growth rate, with a clear differentiation between improvements in sales and contractions in construction starts, reflecting the expectation of real estate companies for a recovery in the real estate sector. 4) With the recovery of household income growth, increased fiscal support, holiday effects, and online promotional activities, among other positive factors boosting, not only the consumption of household appliances and automobiles in the field of upgrading, but also optional consumption showed signs of significant improvement. An important feature of the October economic data is that the slope of the recovery in household consumption exceeds that of investment. In addition to the positive factors mentioned above, the overall package of incremental policies to boost consumer confidence and expectations may be the deeper reasons behind this, with real estate prices stabilizing and increased activity in the financial markets playing important roles in accelerating the improvement of household expectations. Looking ahead, the elasticity of the recovery in the consumption sector in November-December is expected to continue, while the improvement in the investment sector still needs to be monitored for the strength of fiscal efforts and the implementation of incremental policies. Subsequent incremental policies may focus on the weaknesses in investment to further promote a comprehensive economic recovery pattern. Recent policy announcements have already reflected this characteristic: 1) On November 8th, the Ministry of Finance announced a large-scale debt plan, which was passed by the Standing Committee of the National People's Congress. On November 12th, Henan Province announced the issuance of special refinancing bonds for the replacement of existing hidden debts, accelerating the implementation of the debt plan to relieve local debt pressures and improve short-term cash flow in the private sector, while also speeding up the use of funds reserved for fiscal expenditures later this year. 2) This week, the Ministry of Finance has advanced budgeted funds of 56.6 billion yuan for the partial central financial urban affordable housing project for 2025, and several departments, including the Ministry of Finance, announced a series of real estate support policies, such as increasing Stamp Duty discounts on housing transactions and lowering the minimum rate of land value-added tax, to further boost real estate expectations. From high-frequency data, the production side weakened somewhat in the first week of November, but with the formal announcement and implementation of the debt plan, there have been initial signals of improvement in the midstream and upstream production situations, which may lead to a more positive benign cycle in the near term. Considering the unlikely significant drag on economic growth from external demand in November-December, if this improvement trend can be sustained, the probability of achieving the annual economic growth target will further increase. The growth rate of industrial added value in October was 5.3%, compared to a previous value of 5.4%, remaining relatively stable. Looking at specific industries, compared to the previous month, the growth rate of added value in the upstream mining industry rebounded significantly, the growth rate of added value in the midstream raw materials processing industry continued to improve, while the midstream equipment manufacturing and overall downstream industries declined, resulting in a drag. In the upstream industries, the growth rates of coal mining and washing, and oil and gas extraction both experienced slight increases. The growth rates of industries such as chemical raw materials and products, ferrous metals, and non-metallic minerals in the midstream raw materials sector improved. In the midstream equipment manufacturing sector and downstream industries, except for certain industries such as automotive manufacturing and food manufacturing, the growth rates of industrial added value generally declined. The growth rate of fixed asset investment in October was stable, with real estate investment dragging down once again. From January to October, fixed asset investment increased by 3.4% year-on-year, the same as the previous value; the growth rate calculated for the month was also 3.4% year-on-year, matching the previous month's 3.4%. By composition, the growth rates of construction installation engineering, equipment and instrument procurement, and other expenses for the month-on-month year-on-year basis were 4.4%, 14.3%, and -9.4%, respectively, compared to the previous values of 4.1%, 13.8%, and -1.9%. The growth rates of construction installation engineering and equipment and instrument purchases showed some growth, but other expenses had a significant drag. Infrastructure investment growth rate declined, manufacturing investment growth rate continued to rebound, and real estate investment growth rate declined once again. The growth rate of infrastructure investment from January to October was 9.4% (compared to 9.3% previously), with a calculated month-on-month growth rate of 10.0% (previously 17.5%), somewhat lower than the previous month but still at a relatively high level for the year. Structurally, the accumulated growth rates of industries such as electric power, heat production and supply, water production and supply, and rail transportation have seen declines to 24.1% (from 24.8% previously), 14.5% (from 17.1% previously), and an increase to 37.9% (from 37.1% previously) for water management. Meanwhile, industries with previously weaker performances, such as road transportation and public facilities management, showed slight increases with growth rates of -2.1% (from -2.4% previously) and -3.4% (from -3.5% previously) respectively. The growth rate of manufacturing investment from January to October was 9.3% (from 9.2% previously), with a calculated month-on-month growth rate of 10.0% (previously 9.7%), continuing the rebound. Recently, the growth rates of manufacturing revenue and profits are still under pressure, mainly due to the base effect, but under the improvement in domestic demand, corporate production has marginally improved, providing a marginal incentive for manufacturing investment. By sector, in the midstream industries, investments in industries such as railway, shipbuilding, aerospace, computer communication electronics, chemical raw materials and products, and automotive manufacturing saw increases in growth rates, with rates of 33.0% (from 31.8% previously), 13.2% (from 13.1% previously), 11.2% (from 10.1% previously), and 5.9% (from 5.8% previously) respectively; while electrical machinery, metal products, and general equipment saw declines, with growth rates of -2.8% (from -1.6% previously), 15.8% (from 16.4% previously), and 14.The investment growth rate in the traditional Chinese medicine manufacturing industry and the agricultural and sideline food processing industry has fallen compared to the previous year, with a slight increase in the cumulative year-on-year investment growth rate in the textile industry.Real estate development investment increased by -12.3% year-on-year in the current month, down from -9.4% in the previous month, with the decline widening further, and the growth rate falling to a new low for the year. Real estate sales continued to show improvement, but there is still insufficient confidence in the development end, and medium to long-term expectations still need improvement. In October, the national real estate sales area increased by -1.6% year-on-year (compared to -10.8% in the previous month), but the new construction area decreased by -25.7% year-on-year (compared to -17.7% in the previous month). The national residential construction land area traded decreased by -21.0% year-on-year (compared to 13.5% in the previous month), turning from positive to negative again. Weakness in land acquisition and construction may be the main reasons for dragging down other expenses in fixed asset investment. Recent incremental policies in the real estate sector have continued to be implemented, with an increase in tax incentives and the Ministry of Finance allocating 56.6 billion yuan in subsidies for urban affordable housing projects from the central government budget for 2025, demonstrating increased support for the real estate sector. In October, total retail sales of consumer goods increased by 4.8% year-on-year, up 1.6 percentage points from September, significantly exceeding expectations, with a seasonally adjusted month-on-month increase of 0.41%. Among the categories, consumer goods supported by policies such as trade-in for new ones, household appliances and audio-visual equipment, communication equipment, automobiles, cosmetics, sports and entertainment products, and cultural and office supplies had outstanding performance in terms of growth. However, petroleum products and building and decoration materials continue to be major drags. In terms of changes compared to the previous month, the industries with the largest improvement in growth were cosmetics, sports and entertainment products, and household appliances and audio-visual equipment, while automobiles recorded the second highest growth rate of the year, and furniture reached its highest level of the year. The decrease in growth rate of gold, silver, and jewelry was also significantly narrowed. Key points from consumer spending in October: 1. The effect of old-for-new policies supported by fiscal subsidies has been significant, leading to a further increase in the growth rate of major consumer goods. The special national bonds for long-term subsidies in exchange for old items have stimulated the growth of household appliances and audio-visual equipment, with a significant increase in growth rate to 39.2% in October (compared to 20.5% in the previous month). Communication equipment maintained a high growth rate in retail sales, achieving 14.4% (compared to 12.3% in the previous month); the consumption growth rate for automobiles reached the second highest value of the year at 3.7% (compared to 0.4% in the previous month). 2. The promotion during the National Day holiday and "Double Eleven" led to a significant improvement in optional consumption, including cosmetics, sports and entertainment products, and cultural and office supplies. Specifically, in October, cosmetics recorded a growth rate of 40.10% (compared to -4.5% in the previous month), sports and entertainment products recorded a growth rate of 26.7% (compared to 6.2% in the previous month), and cultural and office supplies recorded a growth rate of 18% (compared to 10% in the previous month). The growth rate of clothing and footwear turned positive, recording 8%, compared to -0.4% in the previous month; the growth rate of furniture was 7.4%, compared to 0.4% in the previous month. However, the growth rates of petroleum products and building and decoration materials continued to decline, reaching -6.6% and -5.8% respectively. This was attributed to the downward fluctuations in international oil prices in October, leading to a further reduction in domestic fuel prices and mildly affecting petroleum and its products' consumption, as well as the continued weakness in the real estate industry chain, which still needs improvement in corresponding demand. Overall, the employment situation remains stable, with the unemployment rate in major cities continuing to decline. In October, the national urban survey unemployment rate was 5.0%, a decrease of 0.1 percentage points from the previous month, indicating a relatively low unemployment rate compared to the same period in previous years. In major cities, the urban survey unemployment rate in 31 large cities in October was 5.0%, indicating seasonal decline compared to historical periods, which may suggest that previous employment stability policies are gradually taking effect. In October, the average weekly working hours of employees in national enterprises was 48.6 hours, a decrease of 0.2 hours from the previous month, possibly due to the 7-day National Day holiday. Risk warning: Data calculations may be subject to errors; domestic demand recovery may be slower than expected.