China: Slower headline growth; policy in neutral gear

China’s easing to provide financial support for its economy amidst Fed taper talks should weigh on the yuan exchange rate.
Samuel Tse15 Jul 2021
  • Real GDP slowed to 7.9%yoy in 2Q21 from 18.3% in the previous quarter
  • This is largely a result of dissipating base effect
  • Authority will inject liquidity to prevent tightening of monetary conditions
  • Implication for our forecasts: Downside risk to our 10.5% GDP forecast has increased
  • Implication for investors: USD/CNY will reach 6.6 by end 2021
Photo credit: AFP Photo

China’s real GDP growth slowed to 7.9%yoy in 2Q21 from 18.3% in the previous quarter. This is largely a result of dissipating base effect, as well as a moderation of economic activities.

  • Industrial production grew by 8.3%yoy in June, edged down from 8.8% in May.
  • Retail sales growth slowed to 12.1% from 12.4%.
  • Fixed asset investment eased to 12.6% Yoy YTD from 15.4%.

There was imbalanced growth observed in industrial activities: vehicle production dropped by 13.1%yoy, textile also fell by 1.3%. On the contrary, PPE related products held up well amid temporary COVID outbreak in Guangdong. Medical products rose by 32.5%.  Although exports released earlier this week was strong, (up 32.2%yoy in June, compared to 27.9% in May), export-led industrial activities are likely to moderate in the months ahead as evidenced by the contraction of new export order for two consecutive months. Recovering global production capacity, as indicated by the strong PMIs of trading partners, will regain some production order from China.

On investment front, fixed asset investment (YTD) saw slower MoM growth of 0.35%. Private investment rose by 15.4%yoy YTD in June, compared to 18.1% in May. Public sector investment growth slowed from 11.8% to 9.6%. Mirroring this, infrastructure investment growth decelerated to 7.8% from 11.8% in May. To buttress public investment in the months ahead, the authority must improve project funding. Local governments have only issued 32% of the special bond quota this year.

Manufacturing investment (dropped from 20.4%yoy YTD to 19.2%) saw relatively mild slowdown. This is because disruption of global manufacturing production fostered the return of foreign direct investment, thanks to the well-established supply chain in China.  In the first 5 months this year, no. of new foreign companies reached 18,497, up 48.6%yoy. Meanwhile, the growth rate of computer & telecommunication, at 24.2% in June, remained higher than the headline FAI. Beijing’s effort in technology self-sufficiency will render supports to investment of this sector down the road.

Despite a temporary COVID outbreak in Guangdong, retail sales growth only decelerated slightly. The loss in growth momentum was largely seen in travel-related and contact-intensive sectors, such as food services fell from 26.6% to 20.2%. Given the experience in the past years, future COVID outbreak is likely to be contained speedily. Real income per capita growth of 4.9% in 1Q21 (2-year average growth) was still 1.9%ppt off the 1Q19 level. Services PMI, an early indicator that largely mirror retail sales performance fell sharply from 55.1 to 50.3.

Against this backdrop, it is likely for the central bank to adopt accommodative measures to support the economy. M2 growth rebounded to 8.6%yoy in June from 8.3% in May. This is the strongest reading since March. Aggregate financing extension held stable at 11.0%, with loan growth edged up from 12.2% to 12.3%. Meanwhile, fear of producer inflation eased,  with PPI decelerated notably to 0.3% MoM, from 1.6% previously. Transmission to CPI was also limited as reflected by the relative soft CPI readings (see “RRR cut in sight as inflation fears ease”). As such, China has announced a reserve requirement ratio cut of 50bps for all bank earlier this week. The RRR cut could inject

1trillion yuan to the economy. This could render some support to the economic growth in the months ahead. For now, we are maintaining our 2021 forecast at 10.5%, although downside risk to the forecast has increased.

Further liquidity support to the economy will weigh on the CNY exchange rates. We reiterate our forecast for USD/CNY to reach 6.6 by the end of this year.

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Samuel Tse 謝家曦

Economist - China & Hong Kong 經濟學家 - 中國及香港

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