China first major economy to return to growth since coronavirus shock, but doubts remain about second half outlook
- Chinese economy posted better-than-expected growth of 3.2 per cent in the second quarter from a year earlier, led by industry and infrastructure spending
- But a number of economists expect the economic recovery to plateau in the third quarter on continued subdued consumer spending and weaker exports
China on Thursday became the world’s first major economy to report positive economic growth after the coronavirus shock, although major questions remain over whether the momentum seen in the second quarter will continue in the second half of the year.
On the surface, the world’s second biggest economy posted an impressive rebound in the April-June period, underpinned by improvements in industrial output, retail sales and fixed-asset investment. But the outlook is clouded by escalating confrontation between China and the United States, risks of a “second-wave” outbreak of the pandemic, a weak jobs market and disruptions by summer floods.
However, the Shanghai composite stock index, the benchmark of China’s onshore stock market, plunged 4.5 per cent on Thursday, on fears the government would enact more measures and tighten monetary policy to cool off the recent sharp rise in the market.
Even after the release of the new gross domestic product (GDP) data, doubts remain about the state of the Chinese economy.
Thomas Gatley and Rosealea Yao, economists at Gavekal, wrote in a note that Chinese growth “is shifting from a rebound to a plateau” for the third quarter, arguing it will be harder to achieve any upwards momentum as “the acceleration impulse from fixed asset investment and the industrial sector fades and China’s consumer recovery remains sluggish”.
Trey McArver, partner at Beijing-based consultancy Trivium China, went further, casting doubt on the official Chinese GDP statistics.
“It is highly unlikely that the economy expanded in the second quarter on a year-on-year basis,” McArver wrote. “Our tracking of the economy showed that most businesses were not operating at full strength – especially in the services industries. So we find it very hard to see how the economy could have grown.”
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The Chinese government, meanwhile, hailed the growth figure as a sign that China’s approach to containing the Covid-19 pandemic, including draconian controls on movement and mass testing, has been effective in balancing economic growth with disease control.
Wei Jianguo, a former Chinese vice-minister of commerce, told an online forum on Thursday that China is a “bright spot” in the global economy and so is expected to lure an increasing inflow of investment and talent as the country has shown its advantages over the West.
Shao Yu, chief economist of Orient Securities in Shanghai, said that the better-than-expected recovery in the second quarter was the result of a boom in money supply combined with government fiscal stimulus, which boosted industry and infrastructure spending.
In late May, Beijing announced its largest-ever fiscal rescue package worth around 8.5 trillion yuan (US$1.2 trillion) to help struggling factories and consumers.
However, consumer spending, which contributed over 60 per cent of Chinese growth last year, continues to lag due to concerns about jobs and income.
Underscoring consumer concerns, China’s disposable income per capita shrank 2.6 per cent in the first half compared to a year earlier, casting a shadow over consumer spending for the rest of the year. Retail sales, which cover consumer purchases of goods, continued to drop in June, falling 1.8 per cent compared to a year earlier, though this was a modest improvement from the 2.8 per cent drop the month before.
“The recovery of the demand side was obviously slower than the supply side, retail sales did not return to growth in June, showing [the consumer spending situation) was still quite severe,” said Shen Jianguang, chief economist of JD Digits . “The V-shaped rebound has already come to an end, the economy will plateau in the second half.”
“Last but certainly not the least, the risk of a second wave of Covid-19 cannot be ignored,” he wrote in a note on Thursday. “The Chinese economy, together with the global economy, could be severely hit again if a second wave of the pandemic breaks out this winter.”