The Chinese economy already has the weakest growth in almost three decades, and it’s set to slow further despite upside surprises in a range of activity indicators released Monday.
That’s the conclusion from a close reading of the numbers announced in Beijing, which confirmed that domestic output in the second quarter slowed to a record-low pace of 6.2% from a year earlier. While June retail sales and industrial output beat expectations, as did first-half investment, there’s little evidence that the economy has bottomed out.
China’s slowdown will continue to provide the backdrop to re-booted trade negotiations with the U.S. in the months ahead, with economists forecasting a full-year expansion of 6.2% this year and 6.0% next. A more aggressive stance on stimulus could change that, but that’s something Beijing has been leery of for fear of a financial blow-up.
“We expect the Chinese authorities to focus on stabilizing domestic growth through policy easing while keeping a close eye on macro leverage,” Oxford Economics senior economist, Tommy Wu wrote in a report. “This will also help offset pressures on exports given tepid global trade and that the existing tariffs between the U.S. and China are unlikely to be lifted anytime soon.”
Investment
The government has focused on issuing a special-type of off-balance sheet debt to allow local governments to spend on infrastructure without blowing out their budgets. Authorities have issued some 1.19 trillion yuan ($173 billion) of these special bonds in the first half of the year, much higher than the 361 billion yuan in the same period last year.
However, economists from UBS AG and JPMorgan Chase Bank argue that about 70% of that debt has been earmarked for land reserves or shanty-town renovation, rather than infrastructure projects -- meaning less multiplying effects along the industrial chain than would otherwise be the case.
Zhu Haibin, chief China economist at JP Morgan in Hong Kong estimates that infrastructure investment could accelerate to a year-on-year pace of about 8%, though the outlook is being threatened by the risk of deflation in factory prices.
Retail Sales
Retail sales growth unexpectedly rose to 9.8% in June, aided by a 17.2% jump in car sales. However, that surge was largely driven by discounts on older car models held by dealers in anticipation of tougher vehicle emission standards. The new policy took effect on July 1 in some regions. A further one-off effect was a round of online retail discounts on June 18 -- dubbed “618.” Both factors suggest the pace is unlikely to be sustained.