China: Slower headline growth; policy in neutral gear


China’s easing to provide financial support for its economy amidst Fed taper talks should weigh on the yuan exchange rate.
Samuel Tse15 Jul 2021
  • Real GDP slowed to 7.9%yoy in 2Q21 from 18.3% in the previous quarter
  • This is largely a result of dissipating base effect
  • Authority will inject liquidity to prevent tightening of monetary conditions
  • Implication for our forecasts: Downside risk to our 10.5% GDP forecast has increased
  • Implication for investors: USD/CNY will reach 6.6 by end 2021
Photo credit: AFP Photo


China’s real GDP growth slowed to 7.9%yoy in 2Q21 from 18.3% in the previous quarter. This is largely a result of dissipating base effect, as well as a moderation of economic activities.

  • Industrial production grew by 8.3%yoy in June, edged down from 8.8% in May.
  • Retail sales growth slowed to 12.1% from 12.4%.
  • Fixed asset investment eased to 12.6% Yoy YTD from 15.4%.

There was imbalanced growth observed in industrial activities: vehicle production dropped by 13.1%yoy, textile also fell by 1.3%. On the contrary, PPE related products held up well amid temporary COVID outbreak in Guangdong. Medical products rose by 32.5%.  Although exports released earlier this week was strong, (up 32.2%yoy in June, compared to 27.9% in May), export-led industrial activities are likely to moderate in the months ahead as evidenced by the contraction of new export order for two consecutive months. Recovering global production capacity, as indicated by the strong PMIs of trading partners, will regain some production order from China.

On investment front, fixed asset investment (YTD) saw slower MoM growth of 0.35%. Private investment rose by 15.4%yoy YTD in June, compared to 18.1% in May. Public sector investment growth slowed from 11.8% to 9.6%. Mirroring this, infrastructure investment growth decelerated to 7.8% from 11.8% in May. To buttress public investment in the months ahead, the authority must improve project funding. Local governments have only issued 32% of the special bond quota this year.

Manufacturing investment (dropped from 20.4%yoy YTD to 19.2%) saw relatively mild slowdown. This is because disruption of global manufacturing production fostered the return of foreign direct investment, thanks to the well-established supply chain in China.  In the first 5 months this year, no. of new foreign companies reached 18,497, up 48.6%yoy. Meanwhile, the growth rate of computer & telecommunication, at 24.2% in June, remained higher than the headline FAI. Beijing’s effort in technology self-sufficiency will render supports to investment of this sector down the road.

Despite a temporary COVID outbreak in Guangdong, retail sales growth only decelerated slightly. The loss in growth momentum was largely seen in travel-related and contact-intensive sectors, such as food services fell from 26.6% to 20.2%. Given the experience in the past years, future COVID outbreak is likely to be contained speedily. Real income per capita growth of 4.9% in 1Q21 (2-year average growth) was still 1.9%ppt off the 1Q19 level. Services PMI, an early indicator that largely mirror retail sales performance fell sharply from 55.1 to 50.3.

Against this backdrop, it is likely for the central bank to adopt accommodative measures to support the economy. M2 growth rebounded to 8.6%yoy in June from 8.3% in May. This is the strongest reading since March. Aggregate financing extension held stable at 11.0%, with loan growth edged up from 12.2% to 12.3%. Meanwhile, fear of producer inflation eased,  with PPI decelerated notably to 0.3% MoM, from 1.6% previously. Transmission to CPI was also limited as reflected by the relative soft CPI readings (see “RRR cut in sight as inflation fears ease”). As such, China has announced a reserve requirement ratio cut of 50bps for all bank earlier this week. The RRR cut could inject

1trillion yuan to the economy. This could render some support to the economic growth in the months ahead. For now, we are maintaining our 2021 forecast at 10.5%, although downside risk to the forecast has increased.

Further liquidity support to the economy will weigh on the CNY exchange rates. We reiterate our forecast for USD/CNY to reach 6.6 by the end of this year.


To read the full report, click here to Download the PDF.


 

Samuel Tse 謝家曦

Economist - China & Hong Kong 經濟學家 - 中國及香港
samueltse@dbs.com


Subscribe here to receive our economics & macro strategy materials.
To unsubscribe, please click here.
The information herein is published by DBS Bank Ltd. It is based on information obtained from sources believed to be reliable, but the Group does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation & the particular needs of any specific addressee. The information herein is published for the information of addressees only & is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Group, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Group or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Group & its associates, their directors, officers and/or employees may have positions or other interests in, & may effect transactions in securities mentioned herein & may also perform or seek to perform broking, investment banking & other banking or finan­cial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Sources for all charts & tables are CEIC & Bloomberg unless otherwise specified.

DBS Bank Ltd., 12 Marina Blvd, Marina Bay Financial Center Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E. DBS Bank Ltd., Hong Kong SAR Branch, a company incorporated in Singapore with limited liability. 18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.

The information set out in this website ("Information") is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation. This Information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation. This Information is published for general circulation only and does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person. Visitors accessing this website should always seek advice from an independent financial adviser regarding the suitability of the Information referred to herein (taking into account the specific investment objectives, financial situation and/or particular needs of each person in receipt of the Information) before making any investment and/or any purchase in reliance of the Information. Please refer to the actual research publications for important disclaimers and disclosures, where applicable.