China - More targeted support on the cards

China Macro: We cut our annual growth forecasts for 2023 and 2024

Last Monday, China’s GDP growth numbers for Q2-2023 were published. In line with consensus expectations including ours, quarterly growth slowed significantly, while annual growth accelerated. Quarterly real GDP growth dropped from the reopening pace of 2.2% qoq s.a. in Q1 to 0.8% in Q2, confirming that the reopening rebound in services/consumption is fading and that headwinds from the slowdown in the global demand for goods and the domestic property sector have intensified. Annual growth rose to 6.3% yoy (Q1: 4.5%), but this acceleration was driven by the strong base effect from last year, when China was in a broad Omicron lockdown and megacity Shanghai was closed for five weeks.

Annual growth came in around one point lower than consensus expectations including ours; this unusually large deviation was primarily due to revisions in previous quarters. June data on balance also pointed to a further slowdown, with most indicators coming in weaker than expected – with the exception of industrial production and monthly lending volumes (see our earlier comment on Q2 GDP and June activity data here). Although we expect ongoing piecemeal monetary easing and targeted support measures (see below), we cut our growth forecasts for 2023 and 2024 to 5.2% (from 5.7%) and 4.8% (from 5.0%), respectively.

More targeted support initiatives are being announced

As expected, policy rates have been kept constant this month (including the 1- and 5 -year loan prime rates today), following 10bp cuts in June. Given the strong headwinds from the global slowdown and the property sector, and with inflation pressures being absent, we expect Beijing to continue with piecemeal monetary easing, targeted fiscal support and a relaxation of macroprudential measures, to stabilise the property sector and support domestic demand. Regarding property, the government recently worked out debt relief plans for property developers, and allegedly is considering the easing of home buying restrictions in the largest cities in an effort to boost property sales. In addition, following previous measures such as boosting electric vehicle sales, authorities signalled earlier this week they will soon implement measures to boost household consumption.

More broadly, Beijing also made clear it wants to restore confidence amongst consumers, firms and investors, to address the scarring from previous stringent policies such as Zero-Covid and the regulatory crackdown on internet platforms. The government recently signalled the end of this regulatory crackdown. Moreover, yesterday the CCP and the government issued a joint statement that firms of all types of ownership will be treated equally, and that the support and protection of private companies and entrepreneurs will be stepped up. The steps taken to support the yuan (with the daily fixing set much stronger than the market rate today) should also been seen in the context of restoring confidence. All in all, we still think the authorities will refrain from aggressive easing, partly because they want to keep overall leverage in check, particularly in the property sector, and given other constraints - for instance regarding local government finances.