Growth revised lower again, US-China tensions ease

Economics

Data wrap-up – more downside risks:

GDP weaker than expected: Chinese GDP for Q2 was up 0.8% q/q, which was in line with expectations but the annual growth rate disappointed at 6.3% y/y vs consensus of 7.1% y/y. In nominal terms growth was only 4.8% y/y pulled down by a decline in the deflator of 0.7% y/y. It was the biggest decline since the global financial crisis in 2008 and shows that in GDP deflator terms, China is already seeing mild deflation.

Housing and exports weigh on economy: Key weak spots are the two important sectors housing and exports, which together represent roughly 40% of the economy. The level of home sales dropped further in June to a level 25% below the long-term trend. House prices also declined in June, for the first time since December, with new home prices down 0.1% m/m while existing home prices dropped 0.4% m/m. Export growth moved lower in June to -12.4% y/y from -7.5% y/y in May. Foreign sales were strong during the pandemic due to high goods demand in US and Europe but weak goods consumption since then has hampered Chinese sales.

Consumption holding up: Retail sales were weaker than expected in June falling back to 3.1% y/y (consensus 3.3% y/y) down from 12.7% y/y. The decline is partly due to base effects, though, and looking at the level of retail sales it still shows a decent trend. However, with consumer confidence waning and other parts of the economy being weak, it is key that the government provides further support for the consumer engine.

Consumer stimulus: On Tuesday, China released an 11-point package aimed at “unleashing the potential of household consumption”. It includes support for households to buy new smart home appliances and improved access to credit to buy household products. Director of the National Development and Reform Commission’s policy research office Jin Xiandong, stated that “People’s ability and expectation of consumption is still rather weak and the infrastructure and environment for consumption need to be improved”.

Credit growth higher in June: Aggregate finance increased a bit more than expected but the numbers are very volatile so I prefer the credit impulse instead, which looks at the change over six months. It still points to GDP growth around 4½-5% and PMI levels around 50. Credit growth is weighed down by lacklustre housing finance and low credit demand for investments from private companies whereas infrastructure finance underpins it.

Flirting with deflation: Chinese CPI inflation was 0.0% in June but excluding food consumer prices declined 0.6% y/y, so you can argue China is already in deflation. It highlights the weak demand and excessive inventories. Since inflation is falling faster than nominal rates, the real rate has increased.

More stimulus needed: As the run-down highlights China needs more support to sustain growth and the government is gradually rolling this out. However, following the weak Q2 data I have revised down my forecast yet again for 2023 to 5.2% from 5.8% and to 4.6% in 2024 from 4.8%. To reach the government’s 5% target, China needs to grow around 1% q/q in Q3 and Q4 and thus slightly stronger than in Q2. As seen from my forecast, I still expect this to be realized as I look for the drag from exports to come down a bit in H2 as the CNH has weakened and there are some signs of a moderate turn higher in global manufacturing in H2 in some of our models. More Chinese support measures for housing and monetary stimulus (rate cuts and reduction in Reserve Requirement Ratio) are also expected to drive a moderate improvement in housing from Q2. However, overall stimulus is likely to be moderate and mainly aimed at keeping growth close to the 5% growth target.

More charm offensive towards private and tech sector: In its’ quest to lift confidence in the private sector and not least among tech companies, the Chinese government continues the charm offensive highlighting the central role tech companies play in China’s development and innovation. China’s premier Li Qiang spoke at a symposium with China’s leading digital companies, including Alibaba, Meituan and JD.com, where he also pointed to the sector providing new channels of employment and entrepreneurship. China’s National Development and Reform Commission, vowed further support for platform operators. While the message is important to remove the uncertainty of the government’s commitment to the private sector, it will be hard to lift confidence until the companies see sustained stronger demand as well.

Download The Full Research China