Macroscope | China economy: no massive stimulus, but Beijing could still spring some surprises

After staging an impressive first quarter, China’s economy has lost momentum. Headline GDP growth in the second quarter slowed to 0.8 per cent from the previous quarter, down from the first quarter’s 2.2 per cent sequential growth, due to lacklustre consumer demand and a weaker global macro backdrop.

Recent soft data, such as the manufacturing and services purchasing managers’ indices, and hard data, such as new homes sales and trade numbers, have all fallen short of expectations. Retail sales came in roughly flat on a seasonally adjusted month-on-month basis, after taking into account base effects, and property market investments continue to languish.

While official industrial production figures handily beat estimates, this was probably helped by infrastructure investments during the month. And the slowing growth in goods demand and export sales among industrial firms suggest growth output is seeing some deterioration overall. Meanwhile, the softness in China’s monthly export and import data further confirms that the reopening boom has slowed.

Markets should be careful not to get too carried away with expectations for dramatic or radical stimulus measures. It’s fair to see the June data as showing stabilisation across most sectors – and this view is probably behind the People’s Bank of China’s decision to leave interest rates unchanged on July 17.

While the chances are good that the economy can hit the expected 5 per cent annual growth target due to a favourable base effect, the government may have to step in more forcefully to nudge growth back on track. All eyes are on what stimulus measures can be rolled out in the coming quarter to ensure that the recent weakness in the industrial sector does not impair recovery in the service sector.