China: Economic growth slides in Q2 on financial deleveraging and amid escalating trade disputes
Growth in China lost some steam in Q2, reflecting aggressive financial deleveraging and authorities’ efforts to crack down on shadow banking. While the deceleration came against the context of an escalating trade war with the United States, the actual impact of the dispute will only be seen in H2. GDP expanded 6.7% in annual terms in Q2, a notch below the 6.8% rise recorded in the previous three quarters. Nevertheless, the reading was in line with what market analysts had expected and above the government’s target of 6.5% economic growth for 2018. Sequential data shows that GDP in Q2 adjusted for seasonal factors increased 1.8%, up from the 1.4% expansion recorded in Q1.
Although the National Bureau of Statistics (NBS) does not provide a breakdown of GDP by expenditure, additional data suggests that a moderation in investment growth led the overall slowdown. Tighter credit conditions for local government financing prompted infrastructure investment to record a poor quarter. On the flipside, manufacturing investment accelerated in the quarter, likely reflecting solid company profits and a shift towards higher value-added sectors related to the “Made in China 2025” initiative. Indicators signal that household spending was buoyant in Q2 despite a slowdown in retail sales growth, with consumer confidence hovering at historically high levels in the period. The external sector appears to have detracted from overall growth on the back of slowing export growth and a still-solid expansion in imports. While shipments accelerated in June, the uptick is expected to be short-lived as it mostly reflected front-loaded exports ahead of upcoming tariff increases.
Q2 data reveals that the main headwinds for the Chinese economy are still coming from inside the country. China’s elevated debt prompted Chinese authorities to unveil a series of measures, including tighter regulation and higher borrowing costs, that are finally jeopardizing economic growth. Moreover, the housing market is slowly cooling following the government’s attempt to tame booming prices, especially in tier-one cities. The ongoing trade war with the United States is expected to also weigh on growth in H2 following the tariffs the U.S. imposed on USD 34 billion in Chinese imports on 6 July. While China retaliated immediately to the punitive measures, the U.S. decision to put under review an additional USD 200 billion in Chinese goods and President Trump’s threat to increase it to USD 500 billion will certainly hit business sentiment further down the road. If these new tariffs are effectively enforced, they could shave around one full percentage point to China’s growth in the coming 12 months.