• China 2Q18 GDP growth slows to 6.7% yoy

• Industrial production slowed

• Retail sales grew faster

• Investment growth stabilised

• Future growth relies on supportive policies

The Chinese economy advanced 6.7% yoy in 2Q18, after a 6.8% growth in the previous three quarters and matching market expectations. It was the weakest pace of expansion since 3Q16, amid intensifying tariff battle with the US and efforts to deleverage debt and financial risks. China’s GDP stayed within the range between 6.7% and 6.9% for 12 quarters consecutively.

The primary industry maintained growth at 3.2% yoy in 2Q18, similar to 1Q18 while growth in the secondary industry slowed to 6.0% yoy from 6.3% in 1Q18 even as the tertiary industry grew at a stronger 7.8% yoy compared to 7.5% in 1Q18. Consumption was still the growth engine, contributing 78.5% of economic growth in 1H18, followed by investment (31.4%) then net exports (-9.9%).

For the first half of the year, China's economy expanded by 6.8% compared to the same period 2017. For 2018, the Chinese government targets growth at around 6.5%.

On a quarterly basis, the economy grew by 1.8% in 2Q18, following a 1.4% expansion in the previous three months. It was the strongest quarterly expansion since the 3Q17.

Other economic data that were released for June generally portrayed a moderating growth trend but should not be a cause for alarm for now. Industrial production growth slowed to 6.0% yoy in June, down from 6.8% yoy and missed expectation of 6.5% yoy. It was the slowest growth in industrial output since March, as production increased at a slower pace for all sectors: manufacturing (June: 6.0%; May: 6.6%); electricity, gas and water (June: 9.2%; May: 12.2%) and mining (June: 2.7%; May: 3.0%). From January to June, industrial output grew by 6.7% compared to the same period the preceding year. We expect manufacturing in export sectors will slow further as the trade war begins to materially impact the economy.

Retail sales offered a brighter spot as they grew 9.0% yoy, up from 8.5% yoy and beating expectations of 8.8%. Sales growth accelerated for: garments (June: 10.0%; May: 6.6%); cosmetics (June: 11.5%; May: 10.3%); jewellery (June: 7.9%; May: 6.7%); personal care (June: 15.8%; May: 10.3%); home appliances (June: 14.3%; May: 7.6%); furniture (June: 15.0%; May: 8.6%); telecommunications (June: 16.1%; May: 12.2%); oil, oil products (June: 16.5%; May: 14.0%) and building materials (June: 7.2%; May: 6.5%). Meantime, sales rose at a softer pace for office supplies (June: 3.5%; May: 8.1%), while declined further for automobiles (June: -7.0%; May: -1.0%). Considering January to June, retail trade grew by 9.4%, slower than 10.4% gain in the corresponding period 2017

From January to June, fixed-asset investment - a proxy for infrastructure and construction spending - went up by 6.0%, following a 6.1% rise in the first five months of the year and in line with consensus expectations. It was the weakest reading on record, due to a slowdown in public investment (Jan-Jun: 3.0%; Jan-May: 4.1%). At the same time, private investment grew by 8.4% from 8.1%). By industry, fixed investment growth eased to 12.2% for agriculture from 14.7%; water conservancy, environment and public facilities management (Jan-Jun: 6.3%; Jan-May: 9.2%), and transport, storage and postal industry (Jan-Jun: 6.3%; Jan-May: 7.5%). At the same time, investment fell further for electricity, heat, gas and water production (Jan-Jun: -10.3%; Jan-May: -10.8%). In contrast, investment went up faster for manufacturing (Jan-Jun: 6.8%; Jan-May: 5.2%).

Meanwhile, figures released earlier showed headline CPI in China climbed 0.1 percentage point to 1.9% yoy in June, in line with expectations. It is the highest rate since March, as prices of food went up at a faster pace and cost of non-food continued to increase. On monthly basis, inflation contracted -0.1% following a 0.2% drop in May, the smallest contraction since March this year. In June, food price registered modest recovery (June: 0.3%; May: 0.1%) for the first time since February. Meantime, cost of non-food went up 2.2%, the same as in May. Meanwhile, PPI accelerated to 4.7% yoy from 4.1% in May.

China recorded a trade surplus of USD41.6bn in June as exports jumped 11.3% while imports were up 14.1%. Notwithstanding trade conflict with the US, China's trade surplus with the US widened to a record USD29.0bn in June from USD24.6bn in May. Shipments to US grew by 12.6% yoy to hit the largest on record of USD42.6bn. Meantime, imports grew by 9.6% to USD13.7bn. The six-month trade surplus with the US jumped 13.8% to USD133.8bn, as exports increased by 13.6% and imports by 11.8%. While the June appears unaffected by US trade tariff, the focus should be put on July’s data as tariff on the first USD34bn of goods has taken effect.

Future growth relies on supportive policies

The ongoing trade war will affect future GDP directly via the manufacturing and logistics services sectors. Although both official and Markit manufacturing PMIs remained firm in June, China’s export outlook is increasingly uncertain with the ongoing trade dispute with the US.

China’s broad economic growth is likely to experience a mild slowdown in the second half of the year as financial market risks increased and demand is expected to decline. The economy has already felt the pinch from a crackdown on riskier lending that has driven up corporate borrowing costs. The central bank has since pumped more cash into the economy to ease fears from the start of a trade war with the US by cutting reserve requirements for banks. The PBoC has so far cut the reserve requirement ratio (RRR) three times this year, the latest of which came into effect on 5 July, just ahead of the first US tariff implementation. Uncertainties in both internal and external economic developments are rising. Global trade frictions are intensifying while a spill-over effect from major economies’ monetary policy normalisation will amplify financial market volatility.

Looking ahead, the direct impact of the trade tensions will start to show up in the incoming economic data as the first tariff implementation on USD34bn of Chinese goods took effect on 6 July. Having secured a firm growth of 6.8% yoy in 1H18, we do not expect a significantly weak growth outcome this year. The full-year growth rate will still be in line with the official target of “about 6.5%” GDP growth. We believe that the bulk of the impact will be felt in 2019 and this is highly dependent on what further trade and investment measures that US will take and the responses from China.

Source: BIMB Securities Research - 17 Jul 2018