China’s economy grew more slowly than expected in the second quarter, as tepid manufacturing activity, higher raw material costs, and fresh COVID-19 cases weighed on the recovery momentum. read more
Gross domestic product (GDP) expanded 7.9% in the April-June quarter from a year earlier, official data showed on Thursday, missing expectations for a rise of 8.1% in a Reuters poll of economists. read more
Growth slowed significantly from a record 18.3% expansion in the January-March period, when the year-on-year growth rate was heavily skewed by the COVID-induced slump in the first quarter of 2020.
KEY POINTS
* Q2 GDP +7.9% y/y (f’cast +8.1%, Q1 +18.3%)
* Q2 GDP 1.3% q/q s/adj (f’cast +1.2%, Q1 +0.4% revised)
* June industrial output +8.3% y/y (f’cast +7.8%, May +8.8%)
* June retail sales +12.1% y/y (f’cast +11.0%, May +12.4%)
* H1 fixed asset investment +12.6% y/y (f’cast +12.1%, Jan-May +15.4%)
MARKET REACTION
Asian shares advanced on Thursday as economic data from China was largely more resilient than expected, and as U.S. Federal Reserve Chair Jerome Powell assured that tapering of its massive stimulus was still a way off.
COMMENTARY:
IRIS PANG, CHIEF ECONOMIST FOR GREATER CHINA, ING, HONG KONG
“Considering all of the data released, the recent developments in international politics, and ongoing domestic reforms, the RRR cut and rollover of MLF look more reasonable.
“We believe that there will be another RRR cut in the next quarter if these risk factors do not abate.
“We are revising our 2021 GDP forecast to 9.4% from 8.7%, mainly due to our weaker forecast in 2Q than the reported figure, and a slight upward adjustment for 3Q21 to reflect the boost from the RRR cut.
“We expect no change in policy interest rates for 2021, including the loan prime rate and 7D policy rate. We are keeping our USDCNY forecast at 6.45 for the end of 2021.”
JULIAN EVANS-PRITCHARD, SENIOR CHINA ECONOMIST, CAPITAL ECONOMICS, SINGAPORE
“Base effects continued to distort the June data so we focus on the seasonally-adjusted m/m changes. Retail sales softened to 0.7% last month from 0.8% in May, most likely due to localised curbs in response to a virus outbreak in Guangdong province.
“But the industry improved slightly, with output growth edging up to 0.6% m/m from 0.5%, perhaps reflecting stronger exports and easing shortages of semiconductors.
“Headwinds to growth are likely to intensify during the second half of the year. China’s COVID-19 export boom appears to have peaked and will unwind over the coming quarters as vaccine rollouts and reopening help to normalise global consumption patterns. The upshot is that we expect q/q growth to remain slow by historic standards over the next few quarters, with headline y/y growth likely to end the year below 5%.”
“The release from the NBS says that China’s economy will continue to recover, but still faces external uncertainties. That is a nod to the fact that U.S. demand is going to peak, inventories are already replenished. So we really are looking at that domestic pivot away from the supply side towards the demand side, or in other words, from manufacturing to consumption to take place. That will, however, only happen very gradually because sentiment is subdued as a result of everything that’s been happening on the regulatory front, but also as a result of too-aggressive policy tightening.
“I wouldn’t go as far as calling it a mistake because there’s a whole set of policy priorities that they are trying to balance, but they’ve definitely decided to take a U-turn on that and put a put it on the back burner for the time being to make sure that pickup in domestic consumption does take place in the second half.
LI WEI, SENIOR CHINA ECONOMIST, STANDARD CHARTERED, SHANGHAI
“Solid performance in H1. Upside risk grows after the policy setting turned more supportive with RRR cut and pledges to accelerate infrastructure investment by the government.
“The slowdown angst is overdone.
“The gap between households consumption and income growth narrowed, suggesting recovery in confidence and reduced precautionary sackings.”
XING ZHAOPENG, SENIOR CHINA STRATEGIST, ANZ, SHANGHAI
“The data was largely driven by low base effect as the COVID-19 outbreak in Beijing’s Xinfadi Market took place last June.
“Based on the current situation, if policymakers do not act, the GDP figure in Q4 could fall out of the reasonable range as data from last Q4 was shining.
“Given these factors have mainly influenced the supply side, I expect the government to roll out targeted easing measures.”
GARY NG, ECONOMIST, ASIA-PACIFIC, NATIXIS, HONG KONG
“China’s 2Q GDP shows that the cyclical rebound from the pandemic has peaked. The future momentum will be more normalised and also return to more structural factors as well.
“One of the concerns is if we look at household income growth, it’s still slightly lagging behind the economic growth as well, so that may exert some pressure on consumption. And for investments, basically there is a sharper slowdown from June data mostly because of the base effect, but another point is … there is actually lower bond issuance from the local governments as well. So that means that infrastructure spending may have decelerated as well.
“The PBOC has partially rolled over 100 billion (yuan) … I think it’s a signal that – yes, the monetary policy tone is going to be softer, but it’s not going to be massive liquidity raining into the market.”
LOUIS KUIJS, HEAD OF ASIA ECONOMICS, OXFORD ECONOMICS, HONG KONG
“We recently cut our 2021 GDP growth forecast to 8.4% (from 8.9% previously) to reflect the recent weakness. But we expect growth to gather pace in H2. Household consumption should be supported by rising vaccination and corporate investment by the recovery in profit.”
“We expect the pick-up in H2 momentum to allow policymakers to broadly continue normalizing macro policy. Indeed, we don’t think the recent RRR cut heralds a shift to monetary easing. Meanwhile, the rise in PPI inflation has likely run its course.”
ZHU CHAOPING, GLOBAL MARKET STRATEGIST, J.P. MORGAN ASSET MANAGEMENT, SHANGHAI
“China’s economy looks like on track for recovery, with the 6% annual growth goal in reach. However, the downside and structural risks in domestic demand are concerning. Long-term credit growth has remained weak as the government deploys policies to control leverage and calm the property bubble. The uncertainties in market regulation may also be weighing down short-term consumer and investor sentiment. Nevertheless, resilient external demand could help offset some domestic pressure and support aggregate growth.
“The PBOC announced a 50bp RRR cut last week as a fine-tuning measure. This could help release Rmb 1 trillion funds for bank lending, and lower banks’ funding cost by Rmb 13 billion per year. However, Rmb 1 trillion is still far below the Rmb 4.15 trillion of MLF maturing in 2H2021, suggesting the RRR cut was a structural measure to stimulate long-term lending to small- and medium-sized enterprises, rather than a sharp change in Chinese monetary policy.
Chinese Premier Li Keqiang reiterated that the government will not flood the economy with excessive liquidity, and the PBOC also emphasized that the RRR cut is simply part of normalizing the policy environment, reflecting policy makers’ intention to manage market expectations for strong stimulus.”
WOEI CHEN HO, ECONOMIST, UOB, SINGAPORE
“The numbers were marginally below our expectations and the market’s expectations, (but) I think the momentum is fairly strong.
“For the monthly economic data for June, we see a slowdown in retail sales, industrial production and also fixed investment from May, but in terms of market expectations, all these numbers are better than expected. In particular, the retail sales growth was quite strong – that is quite encouraging.
“On comparison with last year, though, we will get slower growth. We expect second-half growth to be slowing to maybe around 6%.
“Our greater concern is the uneven recovery that we’ve seen so far, and for China the recovery in domestic consumption is very important … retail sales this month was fairly strong and that may allay some concerns.”
BACKGROUND:
* China’s economy has been recovering since the second quarter of last year, buoyed by solid overseas demand for its exports, but growth is losing steam as manufacturing activity slows on higher raw material costs and supply shortages.
* The central bank said it would cut the amount of cash banks must hold as reserves, even as policymakers have been scaling back pandemic-driven stimulus to contain debt and financial risks.
* China’s economy has surprised many with the speed of its recovery from last year’s coronavirus jolt, especially as policymakers have also had to navigate tense U.S.-China relations on trade and other fronts — GDP shrank 6.8% in Q1, 2020 for its first contraction since at least 1992 when official quarterly records started.
* Since then it managed a remarkable rebound and at a quickening pace, partly due to stringent lockdown measures to contain the novel coronavirus, which first emerged in China in late 2019.
* The recovery has been led by export strength as factories raced to fill overseas orders and consumption steadily picked up despite sporadic COVID-19 cases in some cities. read more
* China’s government has rolled out a raft of support measures, including more fiscal spending, tax relief, and cuts in lending rates and banks’ reserve requirements to revive the economy and support employment.
* With the economy back on more solid footing, the People’s Bank of China is turning its focus to cooling credit growth to help contain debt and financial risks, but it is treading cautiously to avoid derailing the recovery.
* Authorities are especially concerned about financial risks involving the country’s overheated property market, and have asked banks to trim their loan books this year to guard against asset bubble.
– Reuters