China: GDP stabilizes in Q2 on policy support
July 18, 2016
Support from Chinese authorities prompted economic activity to stabilize in Q2 as government-sponsored investment remained strong in the April-June period and activity in the industry sector accelerated. Q2 results cast some doubts about the quality of growth in the country as growth had relied on the traditional government-led sectors and cheap credit. China’s GDP increased 6.7% annually in Q2, which was in line with Q1’s result and came in slightly above the 6.6% expansion that market analysts had expected.
Although the National Bureau of Statistics (NBS) does not provide a breakdown of GDP by expenditure, additional data suggest that private consumption slowed marginally in Q2, while overall investment was hit by a sharp slowdown in private investment. A less pronounced drop in exports may have contributed positively to the external sector.
Dynamics in private consumption were broadly stable in Q2 following the sizeable slowdown in Q1 as a result of the plunge in the stock markets observed in the first weeks of January. Retail sales expanded 10.2% annually in Q2, which broadly matched Q1’s 10.3% increase. Although investment among state-owned and state-holding units was strong in Q2, that of private companies slowed markedly in the same period. As a result, urban fixed-asset investment—which covers infrastructure and factory construction—expanded 9.0% in the first half of the year, which was below the accumulated 10.7% rise in Q1.
On the external side of the economy, while weak global demand continued to drag on nominal merchandise exports, overseas shipments declined a milder 3.9% in Q2 compared to the 10.2% drop in Q1. The weakening of the yuan may have played a role in the softer contraction in exports. While subdued domestic demand still represents a drag on imports, the gradual increase in commodity prices prompted imports to contract 6.7% annually in Q2, which was up from Q1’s 13.4% drop. Q2’s larger trade surplus compared to that in Q1 suggests that the external sector fared better in Q2 than in the previous period.
Sequential data showed that GDP in Q2 adjusted for seasonal factors increased 1.8%. This result was up from the 1.2% expansion registered in Q1. Moreover, overall nominal GDP grew 8.4% in Q2, which was above the 7.2% increase tallied in Q1.
The main risks to China’s economic outlook is a worsening external environment and a continued slowdown in private investment. In this regard, Hong Liang, Chief Economist and Head of Research at CICC, and Eva Yi, Senior Economist at CICC, point out:
“The external demand environment may become more challenging amid the Brexit shake-up and rising geopolitical tensions worldwide. On the other hand, the collapse of private sector investment raises serious concerns over China’s growth potential over the medium term. […] Therefore, it is imperative for macro policies to help lower financial cost and investment risks premium for the private sector, and lower the entry of barriers for private investment in growing industries.”
Regarding the recent depreciation of the yuan that led the currency to trade at levels last seen in 2010, analysts do not foresee a much further weakening at least in the short term. However, the FX situation in the long term is much less clear. As Tao Wang, Head of China Economic Research at UBS, said:
“The RMB came under renewed depreciation pressure against USD in the immediate aftermath of the UK referendum. In contrast to the earlier months with USD weakness, the PBC is now, in our view, focusing more on the currency basket in its currency policy management. We expect the RMB will likely be allowed to depreciate a bit more if/when USD continues to strengthen.[…] given the greater degree of uncertainty and volatility triggered by the UK "Leave" vote in FX markets, we think the RMB will now likely be even weaker versus vs USD next year.”