Overview

• There were few positive signs for China’s domestic economy in July, with the rebound in June associated with reopening from COVID-19 restrictions quickly fading. Domestic consumption – as indicated by real retail sales – remains subdued (contracting by 0.8% yoy), and the weakness in credit data suggest little appetite to borrow – prompting the modest cut to the Medium Term Lending Facility rate today. While export growth was strong this month – with China’s trade surplus rising to a record high – the prospect of weaker demand growth in advanced economies will limit the external sector as a source of growth. Last month, we cut our forecast for China’s growth in 2022 to 3.5%, and in this month’s Forward View – Global, we cut the forecast for 2023 to 5.4% (from 5.9% previously).
• China’s industrial production grew marginally more slowly in July – increasing by 3.8% yoy (from 3.9% yoy in June). When compared with pre-pandemic rates of growth, this remains relatively weak – highlighting modest benefits from the reopening from COVID-19 restrictions in June.
• Growth in China’s nominal fixed asset investment slowed in July – up by 3.6% yoy (from 5.8% yoy in June). State-owned enterprises (SOEs) have been the key drivers of investment growth in recent months – nominal SOE investment rose by 11.8% yoy in July, while private sector investment contracted by 0.9% yoy. While producer price growth has eased, real investment remains weak – contracting by 0.7% yoy (from -0.4% yoy in June).
• For the second straight month, China’s trade surplus rose in July to a record high. The surplus totalled US$101.3 billion (up from US$97.9 billion in June). In month-on-month terms, exports edged slightly higher, while imports were marginally softer in July.
• New credit issuance slowed substantially in July – following on from the reopening surge seen in June. Total issuance was just RMB 0.8 trillion (compared with RMB 5.2 trillion previously), with modest increases in government bonds and bank lending accounting for the bulk of this increase.
• In recent months, the People’s Bank of China has repeatedly indicated that it has sought to provide monetary support to the economy, largely via expanding credit availability. There appears to be limited demand for credit – in part related to the weakness in the property sector and the generally weaker state of the private-sector economy – which likely inspired the 10 basis point cut to the Medium Term Lending Facility (MTF) rate in mid-August.
• With advanced economy central banks rapidly lifting policy rates, there has been limited scope for rate cuts in China, with the widening monetary policy imbalance already risking capital flight. Data from the Institute of International Finance show sizeable portfolio (equity and debt) outflows between May and July 2022 – which could force the PBoC to lift rates or implement other measures (such as capital controls) in coming months in order to prevent destabilisation of the financial sector.

For further details, please see China’s economy at a glance (August 2022)