Overview

• The impact of COVID-19 restrictions in major population centres such as Shanghai and Beijing were evident in Q2 national accounts data. China’s economy grew marginally in year-on-year terms, up by 0.4%, but contracted significantly in quarterly terms – down by 2.6%. This result was considerably weaker than expectations.
• Reflecting the larger than anticipated downturn in Q2, we are once again revising down our growth forecast for 2022. We expect China’s economy to grow by 3.5% (4.2% previously), before increasing by 5.9% in 2023 (was 5.6%). This growth will require a significant rebound in activity in the second half – which is likely to be supported by infrastructure developments – meaning that COVID-19 outbreaks remain a downside risk to the outlook. Consumers are likely to remain cautious in the near term, given the lack of fiscal support for households during the pandemic and the risk of further damage to household balance sheets from any further lockdowns.
• The easing of COVID-19 restrictions supported a rebound in industrial activity in June. Industrial production increased by 3.9% yoy (up from 0.7% yoy in May and a 2.9% yoy fall in April). A modest uptick in nominal fixed asset investment growth and easing in producer prices meant that our estimate of real investment growth turned positive, up by 1.0% yoy in June (compared with a 0.4% yoy fall in May).
• China’s trade surplus surged in June, increasing to US$97.9 billion – a new record high. This increase reflected a large month-on-month lift in exports (as COVID-19 measures eased in several key locations) and a modest increase in imports.
• Retail price inflation data was not available at the time of writing, however the uptick in CPI (see below) suggests that it would have risen from the 3.3% rate recorded in May. This means that real retail sales would have declined again in June, albeit less than the 9.7% fall in May.
• In the first half of 2022, new credit issuance increased by 17.8% yoy to RMB 21.0 trillion. Bank lending has increased comparatively modestly – up by just 3.5% yoy over this period, while non-bank lending rose by almost 59% yoy during the first half (led by government bond issuance).
• The People’s Bank of China is still seeking to provide monetary support, however this is likely to come by boosting credit availability (most likely through further cuts to the Required Reserve Ratio or via relending facilities) rather than lowering rates. The PBoC has maintained its primary policy rate, the one year Loan Prime Rate, unchanged at 3.7% since January 2022. Given the rapid increases in policy rates in advanced economies (with more likely in coming months), a widening monetary policy imbalance risks capital outflows that could destabilise the financial sector, as well as putting downward pressure on the currency. This suggests risk of a policy rate hike would appear larger than any further cuts, despite soft domestic demand conditions.

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