China’s Q2 GDP growth slows to 0.8% q/q, raises stimulus expectations

(Reuters) – China’s economy grew at a frail pace in the second quarter, although the annual figure was flattered by base effects, data showed on Monday, with overall momentum faltering rapidly due to weakening demand at home and abroad.

Gross domestic product (GDP) grew just 0.8% in April-June from the previous quarter, data released by the National Bureau of Statistics showed, versus analysts’ expectations in a Reuters poll for a 0.5% increase and compared with a 2.2% expansion in the first quarter.

On a year-on-year basis, GDP expanded 6.3% in the second quarter, accelerating from 4.5% in the first three months of the year, but the rate was below the forecast for growth of 7.3%.

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KEY POINTS

* Q2 GDP +6.3% y/y (f’cast +7.3%, Q1 +4.5%)

* Q2 GDP +0.8% q/q s/adj (f’cast +0.5%, Q1 +2.2%)

* June industrial output +4.4% y/y (f’cast +2.6%, May +2.7%)

* June retail sales +3.1% y/y (f’cast +3.2%, May +12.7%)

* Jan-June fixed asset investment +3.8% y/y (f’cast +3.5%, Jan-May +4.0%)

* Jan-June property investment -7.9% y/y (Jan-May -7.2%)

* Jan-June property sales by floor area -5.3% y/y (Jan-May -0.9%)

MARKET REACTION:

The yuan lost about 0.37% to 7.1680 per dollar after the data release. The yuan recently hit 8-month lows, pressured by the firming U.S. dollar and a flurry of weaker-than-expected weak Chinese data. It has lost more than 3% to the dollar so far this year.

Chinese stocks fell, with benchmark index and blue-chip CSI 300 Index both dropping more than 1%.

COMMENTARY:

CHRISTOPHER WONG, CURRENCY STRATEGIST, OCBC, SINGAPORE

“Second quarter GDP figures were disappointing, but June’s activity data was better than expected, perhaps suggesting tentative signs that the deceleration momentum is slowing.”

LOUIS KUIJS, CHIEF ASIA ECONOMIST, S&P GLOBAL, HONG KONG

“The GDP data is a little hard to interpret because the year-on-year number was significantly weaker than I expected but the quarter-on-quarter number, as reported by the NBS, is a little higher than what I expected, so I’m trying to see if they have revised some of the earlier data.”

“Another observation is that the consumption side is disappointing. We had double-digit retail sales growth in April and May from a very low base, and that has petered out to have only 3.1% nominal retail sales growth, indicating consumers remain quite reluctant.”

CAROL KONG, ECONOMIST, COMMONWEALTH BANK OF AUSTRALIA, SYDNEY

“The data suggests that China’s post-COVID boom is clearly over. The higher-frequency indicators are up from May’s numbers, but still paint a picture of a bleak and faltering recovery and at the same time youth unemployment is hitting record highs.

“Markets have already adjusted lower their expectations (for stimulus), and our base case is that there won’t be a substantial package.”

XING ZHAOPENG, SENIOR CHINA STRATEGIST, ANZ, SHANGHAI

“The main contribution came from consumption, which rebounded from a low base, so the recovery suggested by the data was not solid.”

“Achieving 4.5% growth in the second half of the year to thus hitting the annual target of about 5% should become more difficult. Policies are expected to roll out intensively in the next two weeks.”

“Policy measures are likely to be announced after the Politburo meeting, including population and fiscal policies.”

KEN CHEUNG, CHIEF ASIAN FX STRATEGIST, MIZUHO BANK, HONG KONG

“The weak Q2 GDP figure confirmed the dissipating reopening recovery momentum while market participants were not that surprising to the data disappointment.”

“The data also highlighted that stimulus is required to reinvigorate the economy and the supporting measures are on the cards.”

ALVIN TAN, HEAD OF ASIA FX STRATEGY, RBC CAPITAL MARKETS, SINGAPORE

“It was quite a disappointing number at just 6.3%, so clearly the momentum is slowing down… Also, we had the June indicators out, and the drop in the growth rate for retail sales is quite worrisome … (it) tells you the post-COVID consumption boom is kind of petering out also.

“At this pace, this deceleration, there’s now actually a risk that the growth target may not be achieved — this 5% may not be achieved if the economy continues to accelerate at this pace. So I think that this does raise greater urgency for more policy support soon.”

VISHNU VARATHAN, HEAD OF ECONOMICS AND STRATEGY, MIZUHO BANK, SINGAPORE

“The cursory look suggests that the bottom line remains the same… it doesn’t distract from the fact that actually, the economic momentum is decelerating, not accelerating, particularly when we consider that there’s humongous base effects here.”

“The bottom line of this is China’s economy remains on a very weak footing, many hopes continue to be pinned, and very disproportionately, on large stimulus, (and) even if that comes through, it doesn’t distract from points about bigger trade-offs, whether it is financial stability or stability, and so that means that China’s policy and economic conundrum are not in any way alleviated.”

MARCO SUN, CHIEF FINANCIAL MARKET ANALYST, MUFG BANK (CHINA), SHANGHAI

“Recent economic data were mixed, the credit growth in June picked up, but inflation and the second-quarter GDP growth data came in slower than expected. Should the data show more signs of economic slowdown, I expect the PBOC to cut policy rates by 15 basis points towards the year end.”

WOEI CHEN HO, ECONOMIST, UOB, SINGAPORE

“I think China’s growth would be just near to the official target of 5%. That should call for stronger stimulus measures, especially on the domestic demand side.”

“Consumers are not spending, mainly driven by the bleak outlook for the property market. Disappointing retail numbers and property market sales show it doesn’t seem that the boost from rate cuts is sufficient. I think more needs to be done.”

“It boils down to the property market sentiment. ..the property market is beginning another slowdown – the government will have to come up with more stimulus for property.”

TONY SYCAMORE, MARKET ANALYST, IG, SYDNEY

“There has only been a limited market reaction so far. It was significant miss coming in at 6.3% versus 7.1% expected year-on-year.”

“Today’s set of numbers were likely known by authorities last week, and may explain why policymakers elected to not announce new stimulus at Friday’s State Council meeting.

“Nonetheless, we think more stimulus is required to stabilise and restore confidence in the property market.”

ZHIWEI ZHANG, CHIEF ECONOMIST, PINPOINT ASSET MANAGEMENT, HONG KONG

“Nominal GDP growth turns out to be lower than real GDP growth in Q2, the first time since comparable data are available in Q4 2016. This indicates that risk of deflation is serious.”

MOH SIONG SIM, CURRENCY STRATEGIST, BANK OF SINGAPORE, SINGAPORE

“The data was not entirely a surprise given exporters are still having a difficult time and the property market is still weak.”

“GDP numbers will strengthen the market anticipation that more measures will come, likely after the Politburo meeting in July. The general expectations is that policymakers need to come up with stronger measures to stabilize the weak spots of the economy.”

JING LIU, CHIEF GREATER CHINA ECONOMIST, HSBC, HONG KONG

“China’s rebound is following a different path this time, where consumption has led the recovery. The government has also refrained from massive stimulus, as it is mindful not to exacerbate structural imbalances. Both have led to a more gradual than expected recovery… the recovery will broaden out to other sectors in H2, and forecast GDP to grow by 5.3% for 2023.”

“Policies will remain accommodative in the coming months… There may be more clarity on structural reforms in the upcoming Politburo meeting and 3rd Plenum. We believe reforms will focus on enabling the new growth engines… Enhanced transparency in policy making could also help revive market confidence.”

BACKGROUND:

* Gross domestic product grew a stronger than expected 4.5% in the first quarter, driven by pent-up demand after three years of COVID curbs, but momentum has faded quickly since April as demand at home and abroad weakens.

* Economists blame the fading recovery on the “scarring effects” caused by the strict COVID measures and protracted regulatory curbs on the property and tech sectors. With uncertainties running high, cautious households and private businesses are building up their savings and paying off their debt rather than making new purchases or investments. Youth unemployment has hit record highs.

* While China is still seen on track to hit its modest 2023 growth target of around 5%, a deeper slowdown could stoke more job losses and fuel deflationary risks, further undermining private-sector confidence, economists said.

* All eyes are on an expected Politburo meeting later this month, when top leaders could chart the policy course for the rest of the year.

* Authorities are likely to roll out stimulus steps including fiscal spending to fund big-ticket infrastructure projects, more support for consumers and private firms, and some property policy easing, policy insiders and economists said.

* Analysts polled by Reuters expect the central bank to cut banks’ reserve requirement ratio (RRR) by 25 basis points in the third quarter, while keeping benchmark lending rates steady after cutting them in June for the first time in 10 months.

* Longer term, S&P expects China’s trend growth to slow to 4.4% over 2022-2030 and to 3.1% in 2031-2040, from 6% in 2017-2021. The gradual slowdown is being driven by demographics, economic rebalancing, and reduced international economic interaction amid efforts by the U.S. and other countries to decouple at least partly from China.

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