Analysts expect Q3 and Q4 growth to be between 5 percent to 5.5 percent.
Photo from CFP
By WANG Yu, XIN Yuan
China’s economy grew 0.4 percent in Q2 from a year earlier, slower than Q1’s 4.8 percent. The overall growth rate was 2.5 percent in the first half of the year. The outlook for the second half is brighter as factories reopened and infrastructure investment expanded. But the economy still faces pressure with a teetering real estate sector and a weak job market.
Analysts interviewed by Jiemian News expect Q3 and Q4 growth to be between 5 percent to 5.5 percent. But it will still be an uphill battle to reach the annual 5.5-percent growth target set at the beginning of the year.
Liberal fiscal spending and loose monetary policy will help. More bond issuances are coming. But lower interest rates are unlikely.
Here is what’s going on in the economy.
Infrastructure investment increased 7.1 percent in the first six months (unless specified otherwise, growth rates cited are year-on-year), higher than the 6.7 percent in January-May. The acceleration was partly due to special treasury bond issuance. Local governments issued over 1.37 trillion yuan of bonds in June, more than twice the amount in May and almost 98.7 percent of the 3.5-trillion annual target are complete.
Some analysts believe infrastructure spending may increase by more than 10 percent in Q3 if all 3.5 trillion is issued by August as the central government requires.
In June, the State Council asked banks to extend an 800-billion-yuan line of credit and supplement it with another 300 billion yuan of bonds to fund infrastructure projects (although the money may not hit the account before the end of the year).
Even so, cash may still not be as readily available as many local governments have hoped. Land sales have slowed significantly, and some new bond issuance will be used to service existing debt. Regulators have also been scrutinizing their balance sheets closely. All factors considered, infrastructure spending increase may fall just short of 10 percent in the next quarter.
Developers invested 5.4 percent less than a year ago in H1. Home sales were down 22.2 percent on a square footage basis. Weak sales and tight credit have slashed their funding by 25 percent.
More than 200 cities have loosened buying restrictions since January, but mortgage originations in June were still nearly 25 percent down from a year ago. Price expectation remains suppressed. Recent defaults and embezzlement scandals have further eroded market confidence. The no-faith-no-funding cycle is self-fulfilling, but analysts are cautiously optimistic that recovery is on the horizon as more restrictive policies get reversed.
Industrial production (for industries with annual revenue of 20 million yuan or more) expanded 3.9 percent, higher than May’s 0.7 percent. More factories have reopened or dialed up capacity. Steel mills and car factories were operating at 83.4 percent and 64.2 percent capacity in June, slightly higher than in May.
Manufacturing investment increased 10.4 percent. Corporate borrowing is also rising, with 1.4 trillion yuan of medium-to-long-term new corporate loans taken out in June. The increases are primarily attributable to demand and profits bouncing back post lockdown.
Analysts say that companies will continue to strengthen their supply chains, but they should watch out for high material costs and the impact of tightening monetary policies overseas. Summer power shortages and recurring Covid outbreaks may also cause production delays.
A promising sign is that the Purchasing Managers' Index (PMI), an indicator of business sentiment, was 50.2 in June (above 50 means manufacturers are optimistic and will likely expand production).
Retail grew 3.1 percent in June, back to positive for the first time since April, but restaurant revenues in June were still 4 percent lower than last year’s.
Consumer spending has recovered slower than hoped. People feel poorer, save more, and are wary of future Covid outbreaks. Spending on leisure activities is unlikely to bounce back quickly as Covid risk lingers.
Unemployment is 0.3 percentage points higher than the 5.5 percent target for the six months. The number is down in June, but one in five people aged between 19 and 24 are still without jobs. Inflation-adjusted disposable income grew by only 3 percent from January to June, much lower than the 8.1 percent last year.
The job market will be under pressure again in the second half. Export-oriented businesses will be especially hurt as uncertainties in the global economy weaken demand.