As China’s economic slowdown moderates, analysts call for greater policy easing: ‘it will be a long haul back’

·6-min read

China’s economy showed initial signs of recovery in May in the wake of all-in efforts to stem downturn risks, while overall growth remained fragile and analysts called for strong support measures to sustain a solid recovery.

Key indicators for manufacturing and consumption also improved marginally in May, but pressure on the labour market persisted.

Industrial production, a gauge of activity in the manufacturing, mining and utilities sectors, beat market expectations and reversed the previous month’s abrupt drop to rise by 0.7 per cent in May, year on year, the National Bureau of Statistics (NBS) said.

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Automobile production also picked up last month as pandemic controls were eased and manufacturing started returning to major production regions such as Shanghai and the northeast province of Jilin.

Retail sales continued to contract by 6.7 per cent in May, but the pace was slower than the steep fall of 11.1 per cent in April. Income in the catering sector, which is highly sensitive to coronavirus-control measures, was down by more than 20 per cent with little improvement from April.

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Fixed-asset investments – which Beijing has relied heavily on this year to stem downturn risks – rebounded in May with a growth of 4.7 per cent, from a rise of 2.3 per cent in April, though the year-to-date growth moderated to 6.2 per cent from 6.8 per cent in the first four months.

But the growth mainly came from state-owned enterprises and the construction of infrastructure projects, while the property sector remained weak, said Iris Pang, chief economist for Greater China at ING.

“The only engine of economic growth, currently, is infrastructure investment,” she said.

ING expects China’s gross domestic product (GDP) in the second quarter to contract by 1 per cent, pointing to disruptions caused by strict coronavirus controls that continue to affect the economy in June.

Analysts anticipate a recovery in the second half of the year as a raft of stimulus measures take effect, and many have called for more such measures to cement confidence and invigorate the economy.

But the central bank refrained from lowering the interest rate of one-year medium-term lending facility (MLF) loans on Wednesday, bucking market expectations that a clear signal would be sent to shore up the economy before a key rate-hike decision by the US Federal Reserve on Thursday morning.

Pang noted that the decision does not rule out the possibility of a cut of the mortgage reference rate next week to help the real estate sector and drive up demand for long-term loans, which could benefit infrastructure investment.

“We think the worst of the lockdowns is probably behind us,” said Tommy Wu, lead China economist with Oxford Economics.

“We still expect one rate cut in Q3, as broad-based monetary easing through a rate reduction could be effective in boosting growth after the economy stabilises. But we don’t expect any additional cuts as the policy divergence with the US, and renminbi weakness, will act as constraints.”

With Covid outbreaks an ever-present threat, it will be a long haul back

Sheana Yue, Capital Economics

Sheana Yue, a China economist with Capital Economics, said Beijing could step up credit support to fund construction, but she warned about the impact of the pandemic.

“Early signs are that these [credit] controls are being relaxed – the PBOC has recently shifted its stance to allowing the leverage ratio to rise slightly. This should provide some support for the recovery over the coming months,” she said.

“With Covid outbreaks an ever-present threat, it will be a long haul back.”

The urban surveyed jobless rate, an imperfect measurement of unemployment in China that does not include figures for all of the nation’s tens of millions of migrant workers, remained elevated at 5.9 per cent in May, compared with 6.1 per cent in April.

The jobless rate for the 16-24 age group continued to climb to a record 18.4 per cent in May.

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NBS spokesman Fu Linghui said high unemployment among young people warrants great attention, and he warned of further employment pressure in the coming months with more than 10 million college graduates set to enter the job market.

“Amid the impact of the pandemic, enterprises are facing operational difficulties, which has led to less capacity in creating new jobs, while the youth prefer to take jobs with more stability,” Fu said.

But on the whole, the national economy in May “showed a good momentum of recovery, with negative effects from the Covid-19 pandemic gradually overcome, and major indicators improved marginally”, Fu said.

China’s benchmark CSI 300 index, which includes major companies on the Shanghai and Shenzhen stock exchanges, jumped more than 2 per cent to a three-month high in Wednesday’s afternoon trading session, on hopes of an economic recovery.

“However, we must be aware that the international environment is to be even more complicated and grim, and the domestic economy is still facing difficulties and challenges for recovery,” Fu said.

[China’s] economy will likely run below its potential unless the government takes decisive actions to boost growth

Zhang Zhiwei, Pinpoint Asset Management

Zhang Zhiwei, chief economist with Pinpoint Asset Management, said the recovery remains weak and the outlook for businesses and consumers is bleak, due to the ramifications of China’s strict pandemic controls.

“Outbreaks and the lockdown policy have had a profound impact on economic activities,” he said. “High-frequency indicators show the economy continued to recover slowly … The unemployment rate surprisingly improved a bit, but it is unclear whether the trend is sustainable with millions of students graduating in the summer.

“We think China’s economy faces its most severe challenge in the past 30 years. With the risk of outbreaks and lockdowns looming, consumers and entrepreneurs have become quite cautious. The change of their behaviour dampens economic activities. This means the economy will likely run below its potential unless the government takes decisive actions to boost growth.”

Fitch Ratings lowered its forecast for China’s GDP growth this year to 3.7 per cent, from 4.3 per cent previously, citing the cautious approach by the central government in easing pandemic controls. The credit rating agency also expects activity to recover in the second half of the year, and it predicted China’s GDP will grow by 5.3 per cent in 2023, but it warned of considerable uncertainties surrounding when Beijing might pivot away from its zero-Covid strategy.

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