China - More weakness, more support

China Macro: Quarterly growth slowed in Q2, annual growth picked up on base effect

This morning, Q2 GDP and June activity data were published. In line with market expectations including ours, real GDP growth slowed sharply in sequential terms, to 0.8% qoq, down from the reopening bonus of 2.2% qoq in Q1. This reflected the fading of the reopening rebound and the intensification of headwinds from the downturn in global demand and the property sector. In annual terms, real GDP growth rose to 6.3% yoy (Q1: 4.5%). However, this acceleration in annual growth mainly reflects a strong base effect from last year, when China was in a broad Omicron lockdown and megacity Shanghai was closed for five weeks. In fact, the annual growth number was around a full point below market expectations including ours. We will review our growth forecasts following the latest GDP data (last month we cut our 2023 growth forecast to 5.7%).

June activity data a bit better than expected

Despite the Q2 GDP growth disappointment, the activity data for June published today on balance came in a bit better than expected. Industrial production accelerated to 4.4% yoy (May: 3.5%, consensus: 2.5%), suggesting that the manufacturing sector is stabilising. Fixed investment slowed to 3.8% yoy in January-June (Jan-May: 4.0%, consensus: 3.4%) led by private investment, with the annual contraction in property investment deepening to -7.9%. Retail sales slowed to 3.1 % yoy (May: 12.7%, consensus: 3.3%), and to 0.2% mom s.a. (May: 0.4%), showing that the rebound in consumption following Zero-Covid exit has faded. The jobless rate in urban areas was stable at 5.2%, but youth unemployment rose to a new high of 21.3%. Earlier this month, services PMIs, exports/imports and inflation data came in generally weaker than expected, while lending picked up partly thanks to an end-of-quarter effect. All in all, Bloomberg’s monthly GDP estimate dropped to 5.6% yoy in June (May: 6.3% in May).

Beijing keeps playing the support card, but in a piecemeal and targeted way

With headwinds from the global growth slowdown and the property sector intensifying and inflation pressures being absent, Beijing has resumed piecemeal monetary easing and has launched other support measures, in line with our expectations. Today, the PBoC left the 1-year medium-term lending facility rate unchanged at 2.65%, as expected, but last month several policy rates were cut by 10bp, the first such cuts since August 2022. Although these cuts were not very substantial in itself, they signalled policy makers’ preparedness to step up support to safeguard economic growth. Indeed, the authorities have already taken further measures, such as an extension of a tax break for electric vehicles and the stepping up of support for distressed property developers. Going forward, we expect further piecemeal monetary easing steps in the coming months, such as further mini cuts in policy rates and the reserve requirements ratio for banks, as well as targeted (fiscal) support and relaxation of macroprudential regulation to stabilise the property sector and support domestic demand. Beijing also made clear it wants to restore confidence amongst consumers, firms and investors, and against that background recently confirmed the end of its regulatory crackdown launched a few years ago.