China’s economic system grows slower than anticipated in second quarter By Reuters

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© Reuters. FILE PHOTO: People visit a newly opened shopping mall in Beijing, China, April 16, 2021. REUTERS / Tingshu Wang

(Reuters) – China’s economy grew more slowly than expected in the second quarter as weak manufacturing activity, higher raw material costs and new COVID-19 cases weighed on recovery momentum.

Gross domestic product (GDP) rose 7.9% yoy in the April-June quarter, official data showed on Thursday, and fell short of expectations of an 8.1% increase in a Reuters poll of economists.

Growth slowed significantly from a record 18.3% in January through March when the year-over-year growth rate was heavily skewed by the COVID-induced slump in Q1 2020.

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IMPORTANT POINTS

* Q2 GDP + 7.9% y / y (f’cast + 8.1%, Q1 + 18.3%)

* Q2 GDP 1.3% q / qs / adj (f’cast + 1.2%, Q1 + 0.4% revised)

* Industrial production June + 8.3% y / y (f’cast + 7.8%, May + 8.8%)

* Retail sales in June + 12.1% y / y (f’cast + 11.0%, May + 12.4%)

* Investments in property, plant and equipment in the first half of the year + 12.6% y / y (f’cast + 12.1%, Jan-May + 15.4%)

MARKET REACTION

Asian stocks rallied Thursday as economic data from China was broadly more resilient than expected, and Federal Reserve Chairman Jerome Powell assured that tapering massive stimulus is still a long way off.

COMMENT:

IRIS PANG, CHIEF ECONOMIST FOR GREAT CHINA, ING, HONG KONG

“Given all the published data, recent developments in international politics and ongoing internal reforms, the RRR cut and the extension of the MLF seem more sensible.

“We expect there will be another reduction in RRR in the next quarter if these risk factors do not subside.

“We are revising our GDP forecast for 2021 from 8.7% to 9.4%, mainly due to our weaker forecast in the second quarter than the reported figure and a slight upward adjustment for the third quarter of 21 to take the boost from the RRR – reflect shortening.

“We do not expect any change in key interest rates, including the key rate for loans and the 7D interest rate, for 2021. We are keeping our forecast for the end of 2021 at 6.45.”

JULIAN EVANS-PRITCHARD, SENIOR CHINA ECONOMY, MAIN ECONOMY, SINGAPORE

“Base effects continued to distort the June data, so we focus on the seasonally adjusted m / m changes. Retail sales fell from 0.8% in May to 0.7% last month, most likely due to localized restrictions in response to a virus outbreak in Guangdong province.

“But the industry improved slightly, with production growth climbing from 0.5% to 0.6% m / m, possibly due to stronger exports and a reduction in semiconductor shortages.

“The headwinds for growth are likely to intensify in the second half of the year. China’s COVID-19 export boom appears to have peaked and will weaken in the coming quarters as vaccine rollouts and reopening help normalize global consumer behavior. The bottom line is that we expect q / q growth to remain historically slow over the next few quarters, with year-over-year growth likely to end below 5%. ”

CARLOS CASANOVA, SENIOR ECONOMIST FOR ASIA, UNION BANCAIRE PRIVEE, HONG KONG

“The NBS release stated that China’s economy will continue to recover but still face external uncertainties. This is an allusion to the fact that US demand is peaking and stocks are already replenished. We look at it so really this domestic fulcrum. ” away from the supply side to the demand side, i.e. from manufacturing to consumption. That will happen very slowly, however, because sentiment has been dampened by everything that has happened on the regulatory front, but also as a result of an overly aggressive tightening of monetary policy.

“I wouldn’t go as far as calling it a mistake because there are quite a number of political priorities that they are trying to balance, but they definitely decided to do a U-turn and turn it on their backs.” Brenner for now to ensure that domestic consumption picks up again in the second half of the year.

LI WEI, SENIOR CHINA ECONOMY, STANDARD CHARTERED, SHANGHAI

“Solid performance in H1. The upside risk rises after the political framework tightened with the RRR cut and the commitment to accelerate government infrastructure investments.

“The fear of slowing down is exaggerated.

“The gap between household consumption and income growth has narrowed, suggesting a recovery in confidence and fewer precautionary layoffs.”

XING ZHAOPENG, SENIOR CHINA STRATEGIST, ANZ, SHANGHAI

“The data was largely driven by a low base effect when the COVID-19 outbreak hit Beijing’s Xinfadi market last June.

“Based on the current situation, fourth quarter GDP could fall out of reasonable bounds if policymakers don’t act as the data from the last fourth quarter is shining.

“Given these factors, which have mainly affected the supply side, I expect the government to take targeted easing measures.”

GARY NG, ECONOMY, ASIA PACIFIC, NATIXIS, HONG KONG

“China’s GDP in the second quarter shows that the cyclical recovery from the pandemic has peaked. The future dynamics will normalize and also fall back on more structural factors.

“One of the concerns is that household income growth is still lagging slightly behind economic growth, so this could put some pressure on consumption. And in investing, there is essentially a bigger slowdown from the June data, mainly due to the base effect, but one more point is … there is actually less borrowing from local governments, which means infrastructure spending is increasing too could have slowed down.

“The PBOC has rolled over 100 billion (yuan) in some cases … I think it’s a signal that – yes, the monetary policy tone will be softer, but it won’t rain massive liquidity into the market.”

LOUIS KUIJS, HEAD OF ASIA ECONOMY, OXFORD ECONOMICS, HONG KONG

“We recently lowered our forecast for 2021 GDP growth to 8.4% (from 8.9% previously) to reflect the recent weakness. However, we expect growth to pick up in the second half of the year. Household consumption should be supported by rising vaccinations and corporate investment by the recovery in profits. “

“We assume that the revival of H2 momentum will allow policymakers to continue to normalize macro politics by and large. In fact, we do not believe that the recent RRR cut heralds a shift towards monetary easing. In the meantime, the surge in PPI inflation is likely to have run out. “.”

ZHU CHAOPING, GLOBAL MARKET STRATEGIST, JP MORGAN ASSET MANAGEMENT, SHANGHAI

“China’s economy appears to be on the road to recovery, the annual growth target of 6% has been achieved. However, the downside and structural risks to domestic demand are worrying. Long-term credit growth has been weak as government measures to control debt and calm the housing bubble. Uncertainties over market regulation could also weigh on consumer and investor sentiment in the short term. Still, robust external demand could help offset domestic pressures and to support overall growth.

“The PBOC announced last week a 50 basis point RRR cut as a fine-tuning measure. This could help free up RMB 1 trillion of funds for bank lending and cut banks’ financing costs by RMB 13 billion a year. However, RMB 1 trillion is still a long way off However, among the RMB 4.15 trillion in MLF due in the 2nd half of 2021, suggesting the RRR cut was a structural move to stimulate long-term lending to small and medium-sized businesses rather than a drastic change from the Chinese Monetary policy.

Chinese Premier Li Keqiang reiterated that the government will not flood the economy with excessive liquidity, and the PBOC also stressed that the RRR cut is simply part of normalizing the political environment, which reflects the intent of policymakers to market expectations for strong incentives to control.

WOEI CHEN HO, ECONOMY, UOB, SINGAPORE

“The numbers were slightly below our expectations and the market expectations, (but) I think the momentum is pretty strong.

“For June monthly economic data, we see a slowdown in retail sales, industrial production, and fixed investment as of May, but all of these numbers are better than expected in terms of market expectations. In particular, retail sales growth has been quite strong – which is very encouraging.

“However, we will grow more slowly than last year. We expect growth to slow to around 6% in the second half of the year.

“Our bigger concern is the uneven recovery so far, and the recovery in domestic consumption is very important to China … retail sales have been quite strong this month and that may allay some concerns.”

BACKGROUND:

* China’s economy has been recovering since the second quarter of last year, supported by solid foreign demand for its exports, but growth is slowing as manufacturing activity slows due to higher raw material costs and supply shortages.

* The central bank said it would cut the amount of cash banks need to hold in reserve even after policymakers have scaled back pandemic-induced incentives to contain debt and financial risks.

* China’s economy has surprised many with the speed of its recovery from last year’s coronavirus shock, especially as policymakers also had to cope with the strained U.S.-China relationship on trade and other fronts – GDP contracted 6 in Q1 2020, 8% for the first decline since at least 1992 when official quarterly records began.

* Since then, it has had a remarkable recovery and at an increasing pace, in part due to strict lockdown measures to contain the novel coronavirus, which first appeared in China in late 2019.

* The recovery was led by export strength as factories struggled to fulfill overseas orders and consumption increased steadily despite sporadic COVID-19 cases in some cities.

* China’s government has put in place a number of support measures, including increased government spending, tax breaks, and cuts in lending rates and bank reserve requirements, to stimulate the economy and support employment.

* With the economy back on more solid foundations, People’s Bank of China is focusing on cooling credit growth to contain debt and financial risks, but is cautious to avoid derailing the recovery.

* Authorities are particularly concerned about the financial risks associated with the country’s overheated property market and have urged banks to cut their loan books this year to avoid an asset bubble.

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