China’s slowing economic growth signals fiscal spending could continue into second half of year

China’s economy grew by 7.9 per cent in the second quarter from a year earlier, down from 18.3 per cent growth in the first three months

As economic headwinds grow in the back half of the year, there are mixed forecasts on whether the government is likely to loosen monetary policy

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China’s economy is set to slow in the second half of the year and policymakers are expected to maintain an accommodative fiscal and monetary environment. Photo: Reuters

Published: 8:01pm, 15 Jul 2021Updated: 12:03pm, 2 Aug 2021

China is likely to stay on course with fiscal spending to shore up its slowing economy, analysts say, after a solid second-quarter economic performance did little to assuage concerns about a bumpy road ahead in the second half of the year.

Economists said the Chinese government is likely to advance its infrastructure investment stimulus, including spending on urban transport projects in the Yangtze River Delta and Greater Bay Area, rather than pivot to quantitative monetary policies involving increased credit and cheaper borrowing costs, despite recently releasing an extra 1 trillion yuan (US$154.5 billion) into the banking system to help cost pressure on small and micro businesses.

They also expect policymakers to encourage consumer spending. Economic figures released on Thursday showed retail sales – a key measurement of consumer spending – grew by 12.1 per cent year on year in June, down from a 12.4 per cent increase in May, but above the 10.8 per cent rise expected by analysts in a Bloomberg survey.

Overall, China’s economy grew by 7.9 per cent in the second quarter of the year compared with a year earlier – in line with analysts’ expectations of 8 per cent growth – to post an expansion of 12.7 per cent in the first half of the year.

Headwinds to growth are likely to intensify during the second half of the year

Julian Evans-Pritchard

However, the latest growth figure, in addition to last quarter’s record growth rate of 18.3 per cent, has started from a low base. China’s economy shrunk by 6.8 per cent in the first quarter of 2020, the first quarterly contraction since records began.

“All told, activity in China remained strong in the second quarter. But with output already above its pre-virus trend, the economy is struggling to gain ground at its usual pace,” said Julian Evans-Pritchard, senior China economist at Capital Economics.

“Headwinds to growth are likely to intensify during the second half of the year. China’s Covid-19 export boom appears to have peaked and will unwind over the coming quarters as vaccine roll-outs and reopening help to normalise global consumption patterns.”

While China’s central bank has made efforts to reverse slowing credit growth, which impedes spending, there are no signs of a further relaxation in lending and liquidity ahead, Evans-Pritchard said.