China - Beijing steps up support, as the recovery falters
As China's recovery has lost momentum, the authorities are stepping up support
Reopening rebound in services/consumption offset by weakness in industry and property
We lower our growth expectations for Q2-23 and cut our 2023 growth forecast to 5.7%, from 6.0%
PBoC resumes piecemeal monetary easing; stepping up of targeted fiscal support on the cards
Although strong Q1 GDP and activity data confirmed the reopening rebound in services and consumption, the activity data for April and May were on balance underwhelming, and show that headwinds from the global growth slowdown and property remain serious. Although the PBoC has resumed piecemeal monetary easing and more targeted support directed at weak spots – including real estate – is on the cards, we have lowered our growth forecast for Q2-2023, and for 2023 as a whole.
Disappointing April and May data point to ongoing headwinds from slowing external demand and property
Following solid GDP and activity data for Q1 2023, most (but not all) activity data for April and May came in weaker than consensus expectations. This points to an ongoing divergence between still relatively strong – but fading – momentum in services/consumption, which benefited the most from the reopening rebound, and weakness in construction, industry and private investment. The recent data do make clear that the drag from the slowdown in global demand has intensified, while headwinds from property have not yet eased materially so far. In the pandemic years, Chinese export strength was helped by a rotation in global demand from services to goods, and specifically demand for goods produced in China, but more recently the slowdown in global demand following rapid rate hikes worldwide is making itself felt. On the property sector front, momentum in home sales picked up in Q1, but that revival has been short-lived so far, while property investment and new building starts remain clearly in contraction territory (although this partly reflects a policy of prioritising the completion of existing projects). What is also clear is that consumer confidence has recovered only marginally so far, while private investment remains weak (partly driven down by property investment). We expect qoq GDP growth to cool sharply in Q2 compared to the ‘reopening bonus’ pace of 2.2% qoq in Q1, although yoy growth will surge in Q2 reflecting the base effect from last year. We cut our growth expectations for Q2-2023 and our annual growth forecast for 2023 to 5.7%, from 6.0%.
PBoC resumes piecemeal monetary easing; more targeted fiscal support on the cards
Following weaker data for April/May, the PBoC resumed piecemeal monetary easing, in line with our expectations. The request to banks to cut deposit rates by 15bp in early May was already a signal that mini cuts in policy rates were forthcoming. In recent weeks, the PBoC cut the 7-day reverse repo rate, the rates on its standing facility, and the 1-year rate on its medium-term lending facility by 10bp, while the 1- and 5-year loan prime rates were cut by 10bp as well. Although these mini cuts in policy rates, the first ones since August 2022, are not substantial in itself, they signal policymakers’ preparedness to step up support to safeguard economic growth. Next to further piecemeal monetary easing steps, such as further mini-cuts in policy rates and banks’ reserve requirements ratios, we expect Beijing to come with more targeted fiscal support measures as well. This could come in the form of stepping up lending through policy banks, raising/frontloading local government bond quotas, and other specific measures to stabilise the property sector and support domestic demand. Special tax measures have already been announced, including the extension of a tax break for electric vehicles.