China’s ‘economic momentum’ fuelling June’s GDP growth, skewing quarterly estimates

As China’s tier-one cities reopen following coronavirus lockdowns, state media says June is a ‘key window’ for bolstering economic-recovery efforts and ensuring future resilience
Beijing think tank warns that mounting household debt is raising market fears of a ‘balance-sheet recession’, as seen in the US from 2007-09

China's economic recovery

Frank Tangin Beijing

Published: 11:00pm, 7 Jun 2022

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Chinese state media has raised the tone of a quick economic recovery, after Beijing shifted its priority to stabilisation and kicked off rescue packages from late last month.

It suggests there may be a growing sense of urgency to anchor market confidence as the world’s second-largest economy is striving to correct the economic damages of its zero-Covid policy in the March-May period, while leaders are looking to hang a lantern on achievements of the past decade in the lead-up to the Party Congress later this year.

“As seen from data, a periodic bottom of the economy has been basically confirmed. June will be a key window to see economic recovery and resilience,” the state-run China Securities Journal reported on Tuesday, citing data on crude steel production, power generation, logistics and passenger car sales.

“Given the better pandemic-control situation, economic momentum and support of policy packages, economic growth is expected to rebound,” it said.

As zero-Covid toll intensifies, China unveils 33-point plan to save economy

Last month, Beijing announced a 33-point relief package – including the fast-tracking of infrastructure projects, loan extensions, tax breaks and rebates – after Chinese Premier Li Keqiang issued a rare warning about a potential contraction of gross domestic product (GDP) in the current quarter and vowed that these measures would help get the economy back on track.

China International Capital Corp estimated last week that the nation’s second-quarter GDP growth could be only 1.2 per cent, year on year, compared with 4.8 per cent in the first quarter. And in late May, UBS chief China economist Wang Tao forecast 1.4 per cent growth for the second quarter.

Liu Yuanchun, president of Shanghai University of Finance and Economics, said economic growth could reach 5 per cent in June with existing government policies, and he suspects this will push quarterly growth to around 0.5 per cent.

“As seen from the local implementation details, the economic rebound in June could be stronger than it was two years ago,” he said at a webinar hosted by Peking University’s National School of Development last week, referring to the 3.2 per cent growth seen in the second quarter of 2020, after China’s economy shrank for the first time since 1976 in first quarter of 2020.

June could be a watershed for the economy and market performances

Xiong Yuan, Guosheng Securities

However, to achieve Beijing’s annual growth target of “around 5.5 per cent”, Liu said the country would need its economy to grow by 7 or 8 per cent in the year’s second half.

“This, however, would challenge the fiscal foundation at local levels,” he said.

China is due to release the main economic indicators for May on June 15.

The official manufacturing purchasing managers’ index (PMI) rebounded to 49.6 in May from 47.4 in April. The Caixin manufacturing PMI, which mainly reflects the business activities of small and medium-sized firms, picked up from 46.0 to 48.1.

Xiong Yuan, chief economist at Guosheng Securities, said previous constraints on the economy are changing as tier-one cities Shanghai and Beijing have eased control measures, and 24 of China’s 31 provinces have already completed leadership reshuffles.

“June could be a watershed for the economy and market performances,” he wrote on Monday, expecting further policy loosening.

In a working paper released last week, the China Finance 40 Forum, a Beijing-based think tank of financial officials, executives and academics, said the pandemic has pummelled the household sector and fuelled indebtedness, raising market worries about a balance-sheet recession, which was seen in Japan in the 1990s and in the US from 2007-09.

China’s catch-22? Local cadres, denied lifeline, must find way to save economy

A balance-sheet recession occurs when individuals or companies focus on paying down debt rather than spending or investing, which leads to a slowdown or drop in economic growth.

The paper called for “powerful” countercyclical adjustments to reverse the stalling economic-growth trajectory, and for targeted support to be given to affected sectors.

“China should consider expanding its budget expenditure by 1 trillion yuan [US$150 billion], with the funds allocated to grass-roots organs, virus-hit businesses and areas that can help boost household consumption and revenue,” the working paper said.

“China still has room to cut the interest rate by 100-200 basis points. We should take a bold step to use it, as the economy is currently facing huge downward pressure.”