China growth slows to 7.9% in Q2, easing more than expected

Investors are watching to see if the People’s Bank of China is shifting to an easier policy stance. PHOTO: REUTERS

BEIJING (REUTERS) - China's economy grew slightly more slowly than expected in the second quarter, weighed down by higher raw material costs and new Covid-19 outbreaks, as expectations build that policymakers may have to do more to support the recovery.

Gross domestic product expanded 7.9 per cent in the April-June quarter from a year earlier, official data showed on Thursday (July 15), missing expectations for a rise of 8.1 per cent in a Reuters poll of economists.

Growth slowed significantly from a record 18.3 per cent expansion in the January-March period, when the year-on-year growth rate was heavily skewed by the Covid-19-induced slump in the first quarter of 2020.

Average second quarter growth in 2020 and 2021 was 5.5 per cent, compared with a 5 per cent average for the first quarter, according to the National Bureau of Statistics (NBS).

June activity data slowed from the month before but beat expectations.

"The numbers were marginally below our expectation and the market's expectation (but) I think the momentum is fairly strong," said UOB economist Woei Chen Ho in Singapore.

"Our greater concern is the uneven recovery that we've seen so far, and for China, the recovery in domestic consumption is very important... retail sales this month were fairly strong and that may allay some concerns."

While the world's second-largest economy has rebounded strongly from the Covid-19 crisis, buoyed by solid export demand and policy support, data releases in recent months have suggested some loss in momentum.

Higher raw material costs, supply shortages and pollution controls are weighing on industrial activity, while small Covid-19 outbreaks have kept a lid on consumer spending.

Investors are watching to see if the central bank is shifting to an easier policy stance after the People's Bank of China (PBOC) announced last week it would cut the amount of cash that banks must hold as reserves, just as some other central banks begin or start thinking about exiting pandemic-era stimulus.

On a quarterly basis, GDP expanded 1.3 per cent in the April-June period, the NBS said, just beating expectations for a 1.2 per cent rise in the Reuters poll. The NBS revised down growth in the first quarter from the fourth quarter last year to 0.4 per cent.

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Policy easing?

The PBOC move, which released about one trillion yuan (S$209 billion) in long-term liquidity to bolster the recovery, comes even as policymakers have sought to normalise policy after the economy's strong rebound from the coronavirus crisis to contain financial risks.

It highlights the challenges policymakers will face in rolling back pandemic-era stimulus as the coronavirus continues to flare up around the world.

"The domestic economic recovery is uneven," said Ms Liu Aihua, an official at the NBS at a briefing on Thursday.

"We must also see that the global epidemic continues to evolve, and there are many external instabilities and uncertain factors," she said.

Premier Li Keqiang reiterated on Monday that China would not resort to flood-like stimulus.

Still, economists in the Reuters poll expected more support this year, forecasting a further cut in the bank reserve requirement ratio (RRR) in the fourth quarter.

"Based on the current situation, if policymakers do not act, the GDP figure in Q4 could fall out of the reasonable range as data from last Q4 was shining," said Mr Xing Zhaopeng, senior China strategist at ANZ in Shanghai. "I expect the government to roll out targeted easing measures."


China's strong exports have been a key support to the country's post-Covid-19 recovery, but a customs official said this week that overall trade growth may slow in the second half of 2021, partly reflecting Covid-19 pandemic uncertainties.

"Headwinds to growth are likely to intensify during the second half of the year," said Mr Julian Evans-Pritchard of Capital Economics in a note.

"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."

The NBS data showed China's industrial output grew 8.3 per cent in June from a year ago, slowing from an 8.8 per cent rise in May. Economists in the poll had expected a 7.8 per cent year-on-year rise.

Retail sales grew 12.1 per cent from a year earlier in June. Analysts in the poll had expected an 11 per cent increase after May's 12.4 per cent rise.

Economists in the Reuters poll expected a 8.6 per cent GDP expansion in 2021, which would be the highest annual growth in a decade and well above the country's official target for growth higher than 6 per cent. China was the only major economy to have avoided a contraction last year, expanding 2.3 per cent.

Fixed asset investment grew 12.6 per cent in the first six months from the same period a year earlier, versus a forecast 12.1 per cent uptick and down from a 15.4 per cent jump in January-May.

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