China: Growth downgraded amid Delta worries
- We are revising down China’s real GDP forecast for 2021 to 8.8%
- Industrial production will decelerate amid both external and domestic headwinds
- The retail sector felt the impact of the Delta variant
- Regulatory uncertainties will also dampen investment sentiment ahead
- Implication to investors: We expect the RRR to be cut by another 50bps by the end of this year
Slowdown in economic activities
The significant slowdown of domestic economic data drove us to revise our real GDP forecast for 2021 to 8.8% from 9.5% previously. GDP growth will likely reach 6.4% in 3Q and 5.0% in 4Q.
On the supply-side, industrial production fell for a fourth straight month to 6.4% YoY from 8.3% in Jun amid both external and domestic headwinds. The gradual re-opening of manufacturing plants in advanced economies started dampening China’s export share. Manufacturing PMIs of these economies have stayed above 60 lately. Domestically, provinces classified as medium- and high-risk amid COVID accounted for more than one-third of national GDP. Industrial production will likely halt in the near term. The closure of the Meidong terminal, which processes 25% of the cargo passes through Ningbo-Zhoushang port, will delay planned sailing. In fact, the shipping cost from China to the US and Europe soared tremendously. Elsewhere, Beijing’s ongoing effort to go green will dampen the production as well. Natural disasters in Central China also disrupted recovery momentum.
The retail sector felt the impact of the Delta variant. Retail sales growth decelerated to 8.5% YoY in July from 12.1% in June. Reflecting the situation, the core CPI stayed low at 1.3% YoY. The latest wave of cases spread to more than half of the country’s 31 provinces. Stringent lockdown will be imposed on these areas. High-frequency data such as subway and traffic congestion are drifting down. Domestic tourists cut traveling plans during the peak summer season. The rising jobless rate (rebounded by 0.1% ppt to 5.1% from Jun) also warranted some concerns on income growth and consumption outlook. In addition, stock market consolidation amid ongoing regulator crackdown will weigh on spending power through the negative wealth effect.
Investment sentiment also weakened. Fixed asset investment slowed from 12.6% YoY YTD to 10.3%. In particular, infrastructure investment further slowed to 4.6%. Meanwhile, real estate investment in major cities slumped. For instance, the “Three Red Line policy” drove fixed asset investment in Shenzhen down by 0.4% YoY YTD in 1H21, with real estate investment plunged by 12.9%. Various initiatives such as “Cancellation of School District Houses” will bring uncertainties to real estate investors going forward. Fading state guarantees on bonds should reduce investment in this sector.
Against this backdrop, more fiscal and monetary supports are on the way. The local government will speed up bond issuance to fund infrastructure projects. Local government special bond issuance in Jan-Jul only reached 59% of the quota. On the monetary policy front, the PBOC will continue to inject liquidity into the system to relieve the pressure from maturing bonds (USD1.3trn in the next 12 months). Net changes in PBOC’s claims on other depository corporations had already returned to the positive zone. The authority will likely cut the RRR by another 50bps before the end of this year.
Nowcast model updates for 3Q
After witnessing strong growth of 12.6%YoY in 1H21 vs. -1.6%YoY in 1H20, led mainly by favourable base effects, we estimate growth to have peaked already, with the remainder of the year likely to see a slowdown in growth. Our inhouse Nowcast model estimates GDP growth to slow to 6.4%YoY in Q321 after a rise of 18.3% and 7.9% in Q1 and Q2 respectively, including July’s outturn for key GDP-relevant high-frequency indicators.
Delving into details, we expect industrial production growth to slow in 3Q along with fixed assets investment, loans, and retail sales. On the other hand, exports improved at a slower pace in 3Q, along with non-oil imports.
For the year as a whole, we revise our growth forecast to 8.8% from 9.5% earlier as we expect 2H21 growth to be lower than 1H21, not just on a year-on-year basis but also sequentially.
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