Investment in China

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China - Investment

GDP bounces back in Q2 on gradual normalization and foreign demand for health products

Economic activity rebounded in the second quarter after the coronavirus pandemic hammered the economy in the first quarter, led by a normalization of activity, policy support, strong overseas demand for health products and, late in Q2, a gradual re-opening of the global economy. GDP expanded 3.2% in annual terms in Q2 2020, contrasting the 6.8% decrease recorded in Q1 and stronger than the 2.4% rise expected by market analysts. Seasonally-adjusted quarter-on-quarter GDP jumped 11.5% in Q2, contrasting the 10.0% plunge in Q1.

Industrial activity supported the recovery. Iris Pang, chief economist for Greater China at ING, noted: “Most of the growth [in industrial production] came from raw materials, technology components and energy production. Some will have gone to exports but we expect that some raw materials also went to inventories as infrastructure projects progressed slowly in 2Q20 in general.”

Moreover, strong overseas demand for health products fueled exports notwithstanding the global lockdown. Although urban fixed investment remained in negative territory in January–June, investment activities appear to have improved towards the end of the quarter, especially in infrastructure, due to bold policy support. Private consumption, however, remains depressed even though authorities relaxed some social distancing measures.

Iris Pang highlights that:

“Consumers remain cautious and this continues to impact the hospitality sector. Spending on automobiles dropped on a yearly basis, which could be due to the one-off demand for cars (to avoid taking public transport) has been fulfilled following a pick-up in automobile sales for a few months at the peak of the Covid-19 outbreak.”

Despite the stronger-than-expected Q2’s GDP reading, some analysts are wary of China’s prospects going forward, especially due to atypical high rainfall along the Yangtze River.

Against this backdrop, Ting Lu, Lisheng Wang and Jing Wang, economists at Nomura, noted:

“Pent-up demand will lose steam; some social distancing measures may remain in place due to the protracted pandemic; the surge in exports of medical products and telecommuting-related devices will fade; Beijing appears reluctant to step up stimulus measures (some cities including Shenzhen even introduced a fresh round of tightening measures on property markets); the flooding around the Yangtze River could be the worst in two decades; and rising US-China tensions could hit China’s exports and related manufacturing investment. Last but certainly not the least, the risk of a second wave of Covid-19 cannot be ignored.”

FocusEconomics panelists see the economy growing 1.5% in 2020, which is down 0.1 percentage points from last month’s forecast, before expanding 7.6% in 2021.

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2015   2016   2017   2018   2019  
Investment (annual variation in %)7.0  6.8  4.4  4.8  4.5  

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