China: 2Q GDP preview
- We expect a soft 0.9% GDP print for Q2 due to torpid consumption
- Rising unemployment and a fading export boom point to a weak recovery ahead
- The Federal Reserve’s quickening hike pace limits the PBOC’s room to loosen
- Implications to our forecast: 2022 real GDP forecast is revised downward to 4.2% from 4.8%
GDP is projected to decelerate to 0.9% YOY in 2Q from 4.8% in 1Q. Pandemic outbreaks and lockdowns wreaked havoc on major activities in the second quarter. Retail sales fell 6.7% YOY in May after slumping 11.1% in April. While June figures are likely to improve sequentially thanks to reduced containment disruptions, year-on-year retail contraction may persist foretold by weak 618 mid-year sales. Partly offsetting the consumption drag was a rise in fixed asset investment. Construction PMI expanded due to infrastructure stimulus. On the production side, high frequency data such as oil refinery run rate suggests industrial activities strengthened moderately in June. Supply chain snarls are also on the mend due to normalization of inter-provincial logistics. Production uptick, easing port congestions and global commodity price gains drove headline exports higher. Net exports remained a growth contributor in 2Q due to subdued import demand.
The worst of the downturn is over. But recovery in 2H is unlikely to be too strong. Anemic consumption remains the most daunting challenge owing to labor market strain because sporadic lockdowns have resulted in pay cuts and a hiring freeze. Whereas average per capita income growth over the five years preceding the pandemic was 6.7%, it had fallen to 5.1% in 1Q. Working hours in April-May also remained well below pre-omicron levels. Precautionary savings are on the rise as evidenced by household deposits surging RMB7.86tn between January-May, up 50.6% YOY.
Falling property prices are another concern. New home prices in 70 cities dropped for a ninth month in May despite a month-on-month improvement in residential sales. The mantra of “houses are for the living, not for speculation” signals Beijing’s determination to prevent property prices from surging too rapidly. Chinese household balance sheet is overwhelmingly concentrated in real estate. Negative wealth shock suppresses spending at a time when a strong spurt in consumption is needed for a meaningful economic recovery.
The outlook for trade is cautious. Rising interest rates alongside dwindling fiscal support in the West squeeze real household income, resulting in weaker retail spending. And with global reopening unleashing pent-up demand for services, overseas orders for Chinese merchandise may start declining soon. Shipments of laptops and clothing alike decelerated in 1H commensurate with such changing spending patterns. Tariff reductions by Washington, if any, would likely have a modest impact on China’s export given massive inventories accumulated by American companies in the past two quarters.
Countering slowdown by infrastructure push. The NDRC approved 48 fixed-asset investment projects worth RMB654bn during January-May, with more in the pipeline. Planned investment year to date has risen by 10.5% to RMB12.7tn. Plunging land sales and burgeoning local government debt complicate financing, however.
Among 31 provinces, 26 had debt to fiscal income ratios over 100% as of April, with Tianjin topping the chart at 214.6%. Raising budget deficit or bringing forward special bond issuance from next year’s quota could offset the shortfall. The positive economic impact will likely be evident in 4Q given the time lag between project approval and execution.
PBOC’s lax policy in 1H kept a lid on credit costs across the yield curve. New yuan loans rose for a second month in June to RMB2.81tn. Since July the authority withdrawn a net RMB428bn via open market operations, more than the net injection made in June. That may indicate a subtle shift in policy bias, reducing the likelihood of further LPR and reserve ratio cuts.
As highlighted earlier (see here), a more aggressive Fed policy will limit PBOC’s room to loosen. Excessive easing would exacerbate pressure on the CNY, which has already depreciated 6.0% against the dollar since end-March. Interbank rates will level off over the course of policy normalization. We expect the volume-weighted average of 7-day repo rate to trade higher in 2H and to anchor around the PBOC’s seven-day reverse repo rate of 2.1.
Against such backdrop, 2022 real GDP projection is revised downward to 4.2% (3Q: 5.3%, 4Q: 5.5%) from 4.8%.
To read the full report, click here to Download the PDF.
The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). This report is intended for “Accredited Investors” and “Institutional Investors” (defined under the Financial Advisers Act and Securities and Futures Act of Singapore, and their subsidiary legislation), as well as “Professional Investors” (defined under the Securities and Futures Ordinance of Hong Kong) only. It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies. The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation. The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation.
This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) which is Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Singapore recipients should contact DBS Bank Ltd at 65-6878-8888 for matters arising from, or in connection with the report.
DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E.
DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability. 18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.
DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability. 13th Floor One Island East, 18 Westlands Road, Quarry Bay, Hong Kong SAR
Virtual currencies are highly speculative digital "virtual commodities", and are not currencies. It is not a financial product approved by the Taiwan Financial Supervisory Commission, and the safeguards of the existing investor protection regime does not apply. The prices of virtual currencies may fluctuate greatly, and the investment risk is high. Before engaging in such transactions, the investor should carefully assess the risks, and seek its own independent advice.