© Reuters. FILE PHOTO: Employees work on the trucks production line during an organised media tour to the Shaanxi Automobile Group factory in Xian, Shaanxi province, China May 17, 2023. REUTERS/Florence Lo/File Photo
(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 a low of 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 Apirl 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.”
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.
