China's economy bounces back in Q2 as virus eased but recovery is uneven

Output expanded 3.2% in the second quarter from a year ago beating analysts' estimates

A pedestrian walks past a Uniqlo store, operated by Fast Retailing Co., in the Sanlitun area in Beijing, China. The Chinese economy returned to growth in the second quarter, marking an important milestone in the global struggle to recover from the coronavirus pandemic. Bloomberg
A pedestrian walks past a Uniqlo store, operated by Fast Retailing Co., in the Sanlitun area in Beijing, China. The Chinese economy returned to growth in the second quarter, marking an important milestone in the global struggle to recover from the coronavirus pandemic. Bloomberg

The Chinese economy returned to growth in the second quarter, marking an important milestone in the global struggle to recover from the coronavirus pandemic.

Gross domestic product expanded 3.2 per cent in the three months to June from a year ago, reversing a 6.8 per cent decline in the first quarter and beating the median forecast of 2.4 per cent. In the first half however, output is still down 1.6 per cent on the same period in 2019.

Having shut its economy in the first quarter to arrest the virus spread and managed so far to largely defeat subsequent outbreaks, China is claiming global leadership in dealing with the deadly disease. Yet a conservative stimulus approach has produced only a modest domestic recovery, and one that remains highly vulnerable to setbacks in external demand as shutdowns continue to hamper global activity.

Thursday’s data shows industrial output rose 4.8 per cent from a year earlier, matching the median estimate.

While the Chinese economy returned to growth in the second quarter, retail sales in June missed estimates as they continued to contract, highlighting how confidence remains fragile. Retail sales fell 1.8 per cent, weaker than a projected 0.5 per cent increase.

Fixed-asset investment dropped 3.1 per cent in the first half of the year, versus a forecast slump of 3.3 per cent. The surveyed urban jobless rate fell to 5.7 per cent.

“The recovery in Q2 is strong, but also highly uneven” as the supply recovery is stronger than demand, and investment is stronger than consumption, according to Larry Hu, chief China economist at Macquarie Bank Ltd. “Looking ahead, while the growth momentum would slow inevitably, GDP growth could rebound to about 5 per cent on year in the second half” of 2020, he said.

Today’s data showed the recovery is still largely industry-driven, while consumer sentiment is weaker than expected. A raft of measures have been rolled out since the pandemic to shore up the economy, including tax and fee cuts, cheaper loans, and increased fiscal spending. Stimulus has still fallen far short of the policies offered in developed economies, out of concern for debt buildup and financial stability.

“China’s economy has gradually overcome the negative impact brought by the virus in the first half, showing recovery momentum,” Liu Aihua, NBS spokesperson, said in Beijing after the data was released. “The recovery of the domestic economic recovery still faces pressure amid rising external challenges, as the coronavirus continues to impact the global economy.”

A major headwind to the recovery is the level of unemployment created by the collapse in manufacturing in the first quarter. The surveyed unemployment rate doesn’t capture the full impact, and tens of millions may still be out of work because of the pandemic.

Policy makers are also signalling that monetary and fiscal policy won’t become much more supportive, as long as credit growth continues its upward trend.

“Not out of the woods” is how Helen Qiao, Bank of America Merrill Lynch’s chief economist for Greater China, described today’s numbers. She said retail sales were clearly lagging the recovery in other parts of the economy.

“People still hold a fear against going out and travelling", and the service sector is continuing to feel pain, she said.

China home prices rose at the fastest pace in 10 months in June, prompting some local authorities to introduce fresh housing curbs.

New-home prices in 70 major cities, excluding state-subsidised housing, increased 0.58 per cent last month, National Bureau of Statistics data released on Thursday showed.

Values in the secondary market, which is largely free from government intervention, gained 0.31 per cent, the biggest rise in 11 months.

Property prices have rebounded as the central bank loosens credit to support an economic recovery from the coronavirus shutdown. Frenetic buying is increasingly taking place across large and medium cities, where properties are seen as a safe place to store wealth.

The value of home sales reached a monthly record of 1.84 trillion yuan ($263 billion/Dh965bn) in June, Bloomberg calculations show, as developers offered more projects to boost first-half results.

Policymakers are responding quickly, imposing fresh curbs to cool demand. Earlier this month, authorities in Ningbo raised eligibility requirements to buy a property. Tech hub Shenzhen imposed harsher curbs on Wednesday, raising the bar for first-time buyers.

“The government wants to exclude property from their credit easing, and has been reacting fast to any sign of a housing bubble,” Nomura Holdings property analyst Leif Chang said before the data was released. “We expect home-price growth to slow in the third quarter.”

For the full year, Nomura forecasts average nationwide house-price growth of three per cent. However, performance may diverge heavily between large and small cities, as some economically weaker towns still see subdued sales, according to China Real Estate Information Corp.

Updated: July 16, 2020 12:42 PM

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