(Reuters) – China’s economy grew more slowly than expected in the second quarter, as slowing manufacturing activity, higher raw material costs and new COVID-19 outbreaks weighed on the recovery momentum.
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.
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%)
COMMENTARY:
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, of course, 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 becaue 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.
“If we look at the MLF operaiton (today), 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. I think the key to watch is … especially in August and November, on how much the PBOC will actually roll over the MLF, because that will have important implications for the degree of the change of monetary policy of the PBOC.”
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
“Overall, China’s economy looks to be 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, even if strong export growth looks unsustainable.
“In terms of policy response, 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. During this week, 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.
* 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.
(Reporting by Asian bureaus; Editing by Sherry Jacob-Phillips)
