China’s Economy Returns to Growth Amid Global Virus Struggle
Gross domestic product expanded 3.2% in the three months to June from a year ago, reversing a 6.8% decline in the first quarter and beating the median forecast of 2.4%. However, the economy is still 1.6% smaller than at the end of the first half in 2019.
Having shut its economy in the first quarter to arrest the virus spread and managed so far to largely defeat subsequent outbreaks, China is claiming global leadership in dealing with the deadly disease. Yet a conservative stimulus approach has produced only a modest domestic recovery, and one that remains highly vulnerable to setbacks in external demand as shutdowns continue to hamper activity elsewhere.
The CSI 300 Index fell 1% at 10:54 a.m. local time, heading for the first three-day loss since May, further evidence that the recent exuberance in Chinese stocks is fading.
Further details from Thursday’s data release:
Industrial output rose 4.8% from a year earlier, matching the median estimate. Retail sales shrank 1.8%, weaker than a projected 0.5% increase. Fixed-asset investment shrank 3.1% in the first half of the year, versus a forecast drop of 3.3%. In the first half of the year, industrial output was 1.3% smaller, while retail sales shrank by 11.4%. The surveyed urban jobless rate fell to 5.7%.
“The recovery in the second quarter and June has remained uneven -- one that was driven by credit stimulus as evident in the strong infrastructure and property investment, while the recovery in retail sales and private investment has continued to lag,” said Michelle Lam, greater China economist at Societe Generale SA in Hong Kong. “Given the buoyant stock market and housing inflation in selected cities, policymakers will probably save bullets and hold back broad-based easing and find the current growth trajectory acceptable.”
Today’s data showed the recovery is still largely industry-driven, while consumer sentiment is weaker than expected. A raft of measures have been rolled out since the pandemic to shore up the economy, including tax and fee cuts, cheaper loans, and increased fiscal spending. Stimulus has still fallen far short of the policies offered in developed economies, out of concern for debt buildup and financial stability.
Private companies were still cutting back on investment in the first half of the year, while spending by state-owned firms saw a big jump in June, rising 2.1% in the first six months after falling 1.9% through May. Manufacturing investment was down almost 12%.
“China’s economy has gradually overcome the negative impact brought by the virus in the first half, showing recovery momentum,” Liu Aihua, NBS spokesperson, said in Beijing after the data was released. “The recovery of the domestic economy still faces pressure amid rising external challenges, as the coronavirus continues to impact the global economy,”
What Bloomberg’s Economists Say...
China’s economy bounced back strongly in 2Q - but now the challenge will be to sustain the recovery. “Continued momentum in June production bodes well for growth in 2H. But weak consumer spending remains a serious, persistent drag.”
-- Chang Shu and David Qu
Policy makers are also signaling that monetary and fiscal policy won’t become much more supportive, as long as credit growth continues its upward trend.
China’s macro leverage ratio continued to rise in the second quarter albeit at a slower pace than in the first three months. The ratio stood at 265.4% at the end of June, versus 258% in March, according to Bloomberg calculations.
A major headwind to the recovery is the level of unemployment created by the collapse in manufacturing in the first quarter. The surveyed unemployment rate doesn’t capture the full impact, and tens of millions may still be out of work due to the pandemic.
Fighting unemployment and creating jobs are one of the main focuses of the government since the pandemic broke out. Premier Li Keqiang said earlier this week China needed to prepare for “tough challenges ahead, especially posed by the high employment pressure and other difficulties confronting the economy.”
CEO Appeal
Another headwind for the government is the increasing efforts of the U.S. to isolate China, banning its own firms from doing business with some Chinese companies and entities, and also pushing other nations to do the same. In a recent letter that was reported Thursday, President Xi Jinping appealed to global CEOs to continue doing business in China, promising to deepen reform and opening up.
Economists stressed the uneven nature of the recovery and the risks ahead.
“The message is clear here that China’s recovery is much stronger than the rest of world, largely benefiting from the effective epidemic control and the orderly normalization procedure,” said Zhu Haibin, Chief China Economist at JPMorgan Chase and Co. “But we do see the divergence in the Chinese economy. Production is ahead of consumption. In the second half, the momentum of further recovery will be softer.”
(Updates with more comments, details on investment.)
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