China’s Q2 GDP release surprised to the upside posting a 3.2% rebound from the historic 6.8% contraction in Q1. The pace of economic growth exceeded expectations by 0.8 percentage points, with industrial production continuing to lead the rebound in the second quarter, rising 4.8% in June. Industrial production growth accelerated by 0.4 pp from May, with the production of computers (+13.6%) and electrical machinery (10.3-16.4%) the top contributors to the acceleration in IP growth.
Fixed asset investment rose from -5.6% to -5.3% in June, though not as fast as expected. Excluding rural investment, fixed asset investment year-to-date now sits 3.1% off the pace of 2019, slightly above expectations of -3.3%, a 13.0% rebound QoQ. All categories of fixed asset investment improved in June, with notable improvements in infrastructure (+17.0% QoQ) and manufacturing (+13.5% QoQ). Private investment reached RMB15.786trn, down by 7.3% YTD but up 11.5% QoQ. Property investment remained at 8.4% YoY in June from May.
The main concern was retail sales, which rose from -2.8% YoY in May to -1.8% YoY in June, continuing to lag the rebound in the supply side. Catering spending rose from -18.9% YoY in May to -15.2% YoY in June, but highlights the slow return of consumers to bars and restaurants. Befitting with the shift on consumption patterns, online goods sales continued to climb from 22% YoY to 25.2% YoY in June. This highlights the still wary nature of consumers in China’s economy and the reduction in shop footfall, with sentiment definitely taking a secondary hit with the localised outbreak in Beijing. The services industry output index increased by 2.3% in June vs 1% in May, in line with the latest trend of services PMIs outstripping manufacturing.
The GDP release surprised us and the market this morning as the data showed a much faster economic recovery, predominantly due to the strength of the industrial production rebound.
With downside risks to the Q2 GDP print coming from flooding in Southern China, higher than average temperatures weighing on consumer demand, a higher base for June’s GDP and a localised lockdown in Beijing weighing on the capital’s output, national consumer sentiment, and domestic travel, the positive surprise in the data is even more impressive. However, with non-medical export growth weighing on overall economic activity, fiscal and monetary support moderating, and consumption lagging, we expect the pace of China’s economic recovery to slow from here on in.
Despite the Q2 GDP release, Chinese equities struggled to maintain a “healthy bull market” today. The CSI index closed 4.81% lower in today’s session, marking its biggest one-day loss since markets reopened in February, with losses driven by Kweichow Moutai Co (-7.9% today). Kweichow Moutai Co is China’s largest domestically listed company. In part, this was a reflection of today’s release highlighting how fragile both domestic and external demand conditions. Although additional factors are in play. The People’s Daily newspaper has been targeting Moutai’s alcohol due to its high price leading to its inclusion in high profile corruption cases. Further, liquidity has been systemically withdrawn from markets by the PBoC over the last month or so. On top of that, last week saw targeted restrictions aimed at property and equity markets. Notably, property regulation in Shenzhen have been tightened due to house prices in the tech hub surging the most in two-year over the last two months.
Taken cumulatively, the conditions aggregated and weighed on both equity markets and the yuan today, while the deteriorating external climate due to heightened Covid cases weighing on market risk sentiment globally.
This comes at a time when a positive beat in China’s GDP would generally support risk appetite and extend the yuan’s recent rally. The positive surprise in today’s GDP does support the idea that further broad stimulus measures are going to require a dramatic deterioration in the economic recovery, however. The PBoC especially are likely to continue with targeting liquidity injections when necessary and potentially loosening the RRR rate if needs be down the line. Although with the PBoC referencing that monetary transmission has shown a marked improvement of late and that efforts will continue to focus on improving it, even RRR cuts in 21H2 aren’t a foregone conclusion.
It looks like a V to me, but such a speedy recovery is unlikely to last
USDCNY trades back up to 7.00 level in today’s session as equity indices such as the CSI 300 slide
Author: Simon Harvey, FX Market Analyst