Overview

• China’s latest national accounts data showed continued strong growth in Q2, with economic activity expanding by 7.9% yoy – broadly in line with market expectations. With economic growth in Q2 broadly in line with our expectations, our forecast for growth in 2021 is unchanged at 9.5%. That said, risks around this forecast are likely weighted to the downside. Similarly, our forecasts for 2022 and 2023 are unchanged – which sub-6% growth as household consumption returns to the forefront of economic activity.
• China’s industrial production growth eased a little in June – increasing by 8.3% yoy (compared with 8.8% yoy in May). There has been a downward trend in the year-on-year rate for several months, as base effects gradual erode. On a seasonally adjusted basis, month-on-month growth in industrial production was around 0.56%, broadly around the trend exhibited since November 2020.
• Nominal growth in China’s fixed asset investment was marginally higher in June – up by 6.0% yoy. Producer prices have accelerated significantly in recent months – with the increase in factory gate prices rapidly flowing through into the cost of investment goods. We estimate real fixed asset investment fell by 4.0% yoy (compared with a 3.1% yoy fall in May and a 3.9% yoy increase in April).
• China’s trade surplus widened further in June – totalling US$51.5 billion (compared with US$45.5 billion in May). Both exports and imports rose month-on-month, with a larger increase in exports driving the increase in the surplus.
• Real retail sales eased a little in June to 9.8% yoy (from 10.1% previously). Retail sales continue to lag other major indicators – suggesting that China’s economic growth remains imbalanced (which consumption lagging). When compared with June 2019, real retail sales were around 6.6% higher – well below the double digit growth in industrial production.
• In the first half of 2021, new credit issuance totalled RMB 17.7 trillion, a decrease of 15.1% yoy. Over this time, bank lending increased – up by 3.9% yoy – totalling RMB 13.2 trillion (or 74% of the total). In contrast, non-bank lending fell by over 44% yoy over the first six months, to RMB 4.5 trillion. This largely reflected declines in corporate and government bond issuance – which fell by 56% yoy and 35% yoy respectively over the period.
• The People’s Bank of China (PBoC) announced a surprise cut to the Required Reserve Ratio (RRR) on 9 July. This cut will free up around RMB 1 trillion for banks (albeit not all of it will be available to lend), with an unidentified portion of the RMB 1 trillion being used to repay maturing medium term loans. Around RMB 4.15 trillion of MLF loans from the PBoC mature in the second half of 2021. The Loan Prime Rate (the PBoC’s main policy rate) has remained at 3.85% since April 2020 and we anticipate it remaining at this rate for some time.

For further details, please see China’s economy at a glance – July 2021