China: Strong headwinds from property, COVID-19 and global recession risks
|Outlook. We lower our GDP forecast for 2022 to 2.7% (from 3.7%) while keeping the 5.7% forecast for 2023. The economy recovered in June in a post-lockdown rebound. However, China is facing renewed headwinds from rising property stress and weakening US and euro demand. Q2 GDP was weaker than we expected falling 2.6% q/q. Uncertainty over new possible covid restrictions takes a big toll on private consumption and small businesses and the arrival of the more contagious Omicron variant BA.5 is adding to the uncertainty. The main impetus to growth comes from stimulus, not least the part related to infrastructure.
China today
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Growth. PMIs rebounded further in June and the credit impulse is robust. Retail sales increased in June but is still weak. Confidence is very low. The property sector is still in a deep crisis and stress among developers has increased again lately.
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Inflation. PPI inflation declined further to 6.1% in June coming from 13.5% in October. CPI inflation is edging higher to 2.5% in June from 2.1% in May, but still below the 3% target.
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Monetary policy. PBoC has kept the RRR rate unchanged since April. China is reluctant to cut rates and prefers fiscal policy to underpin growth. M1 growth is still weak.
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CNY. The yuan is still stable against USD after weakening in May.
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Stock markets. Stocks declined lately on renewed concerns over the property sector and covid. The China USD offshore high yield rate has pushed higher to almost 26%.
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