China’s economy at a glance – July 2019

Growth slowed in Q2 but policy support should see it stabilise.

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  • China’s economy grew by 6.2% yoy in Q2 2019 – in line with our expectations – down from 6.4% yoy in both Q1 2019 and Q4 2018. This rate of growth is softer than the trough recorded during the GFC, meaning that growth in Q2 was the slowest since 1990. Policy makers continue to send mixed messages regarding economic stimulus – however we believe that they are providing sufficient monetary and fiscal support to stabilise short term economic growth around these levels (although trade remains an uncertainty). Our growth forecasts remain unchanged, at 6.25% this year, 6.0% in 2020 and 5.8% in 2021.
  • China’s industrial production grew surprisingly strongly in June – increasing by 6.3% yoy, compared with just 5.0% in May (which was the weakest increase since the GFC). China’s two main manufacturing surveys converged in June – at 49.4 points – as export measures deteriorated.
  • China’s fixed asset investment grew more strongly in June – with real investment accelerating to 6.3% yoy (from 3.8% previously). Much of the recent pick up in investment in recent months has been driven by State-Owned Enterprises (SOEs) – indicative of government directed measures to stimulate growth.
  • China’s trade surplus continued to widen in June, reflecting a sizeable month-on-month decline in imports while exports were only marginally lower. The surplus totalled US$51.0 billion, compared with US$41.7 billion in May. Trade with the United States accounts for the majority of China’s trade surplus. Two-way trade between the countries has fallen following the implementation of tariffs, but this has not substantially reduced China’s trade surplus with the US, which rose to a new record of US$330.8 billion for the twelve months to June.
  • Real retail sales growth has continued to recover – increasing by 7.5% yoy (compared with 6.4% in May). Consumer confidence was marginally weaker in May – at 123.4 points (down from 125.3 points in April) – however this remains at levels that are historically high.
  • The provision of monetary support to China’s economy has been clearly evident in credit growth in the first half of 2019, and suggests that Chinese authorities have been more concerned this year with short term growth than medium term debt risks. New credit issuance increased by over 31% yoy in this period, to total RMB 13.2 trillion.
  • Rumours in July suggest that the PBoC is set to cut the benchmark one-year lending rate. This move (should it happen) would be largely symbolic – the rate hasn’t changed since October 2015, and doesn’t appear to be particularly relevant since the switch in monetary policy from a quantity to a price based approach (which occurred in November 2015). In contrast, short term interbank lending rates are more important and these rates eased in late-June and early July. The three month Shibor has fallen from around 2.9% in mid-June to around 2.6% at the time of writing.

For further details, please see China’s economy at a glance – July 2019