Do China’s rising retail sales point to an economic upturn in the second half of 2019? Not so fast

There have been some ‘green shoots’, but Beijing remains hesitant to amp up stimulus while deleveraging continues

That leaves it to domestic demand, which has yet to show signs of being strong enough to spur recovery

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Shoppers are reflected on the window panels of a fashion boutique at a popular shopping mall in Beijing. Despite economic headwinds, China’s retail sales jumped up 9.8 per cent in June, their best performance in more than a year. Photo: AP

Aidan Yao

Aidan Yao is a senior investment strategist for Asia at Amundi, based in Hong Kong.

Published: 2:00pm, 31 Jul 2019Updated: 10:35pm, 31 Jul 2019

A slowdown in China’s second-quarter gross domestic product, while anticipated, showed the economy at its slowest pace of growth since the early 1990s. From a cyclical perspective, fears of a double dip in the economy have materialised. The ongoing impact of the US-China trade war and premature withdrawal of stimulus after April have cooled the growth engine in the manufacturing sector, which accounted for the lion’s share of the second-quarter slowdown.

While the policy environment has turned more supportive since then, the trade conflict has intensified, with additional tariffs levied in May yet to be reflected in the economic data. If the latest purchasing managers index (PMI) is a guide, the worst for the manufacturing sector still lies ahead.

Fortunately, it is not all doom and gloom. The latest activity also contained a few bright spots, with both industrial production and fixed asset investment growing at a faster pace in June. But the biggest surprise came from retail sales, where growth jumped to 9.8 per cent, reaching a 15-month high.

Judging by these numbers, the economy appears to have regained its mojo towards the end of the second quarter. What is unclear is whether this is just another transient growth rebound, like what happened after March; or whether the “green shoots” could gradually broaden to bring about a sustained recovery in the economy.

We are leaning on the side of caution. To the extent that these out-turns were a “surprise” highlights their inconsistency with other data and people’s perception of prevailing economic conditions. Even if the numbers are accurate in capturing the current reality, we do not see enough tailwinds that could help to extend it into a sustained cyclical upswing.