• China 2Q21 GDP growth decelerated to 7.9% yoy

• Sequentially, China’s growth reaccelerated to 1.3% qoq in 2Q from downward revised 0.4% qoq in 1Q

• On two-year average, China’s growth reaccelerated to 5.5% in 2Q from 5% in 1Q

• No signs of loss of growth momentum as most indicators recovered further on two-year average growth

• Retail sales and industrial production grew by 12.1% yoy and 8.3% yoy respectively in June

• Fixed asset investment rose YTD 12.6% yoy

• Above expectation export growth in June

• Inflation abated in June

• COVID-19 continues to pose risk to growth

China's economic growth moderated notably in the second quarter largely due to the high base of comparison. Nonetheless, the pace of expansion remained strong underpinned by consumer spending. China's GDP growth slowed to 7.9% yoy in 2Q21 after plateauing at 18.3% in the previous three months, signaling a halt to the V-shaped recovery from the COVID-19 pandemic. In quarter-on-quarter basis, momentum has remained fairly strong at 1.3% qoq, picking up from downwardly revised 0.4% qoq in 1Q21 from 0.6% qoq previously. Overall, the economy grew by 12.7% yoy in 1H21. China aims to achieve above 6% economic growth this year.

Despite the significant deceleration of year-on-year reading, from two-year average perspective, China’s growth momentum remained resilient in the second quarter. The National Bureau of Statistics said that the average, 2-year average GDP growth in the second quarter of 2020 and 2021 was 5.5% compared with 5.0% average for the first three months of the year.

Growth has moderated across the industries in 2Q21 with the sharpest slowdown seen in the secondary industry to 7.5% yoy from 24.4% yoy in 1Q21. In the tertiary industry, growth was lower at 8.3% yoy compared to 15.6% yoy in 1Q21 but the recovery has continued to take hold given the rebound in the 2-year average 2Q growth to 5.1% yoy from 4.7% yoy in 1Q. Primary industry growth has stabilised at 7.6% yoy in 2Q21 from 8.1% yoy in 1Q21.

China’s economy sustained a steady recovery but the National Bureau of Statistics warned that there were still concerns about the global spread of the pandemic and “unbalanced” recovery domestically. June economic indicators showed growth in retail sales, industrial production (IP) and urban fixed asset investment (FAI) slowing but were all above expectations. The month-on-month growth for these indicators have also kept up with gains in May, suggesting that the outlook has remained largely stable.

Retail sales rose 12.1% yoy in June following a rather disappointing turnout in the two preceding months. In 1H21, retail sales were up 23.0% yoy with the average 2-year growth at 4.4% for the period which is still a distance from the 7-8% monthly growth rate prior to the pandemic. The contribution from final consumption to GDP growth was at 61.7% in the first half, much higher than contribution from capital formation at 19.2%. The online retail sales rose 23.2% yoy in 1H21 with 2-year average growth of 15.0% in the period or 1.5 percentage points faster than that of the first quarter. Specifically, the online retail sales of physical goods were up by 18.7% with an average two-year growth of 16.5%, or 1.1 percentage points faster than that of the first quarter, accounting for 23.7% of the total retail sales of consumer goods. In June, restaurant sales rose 28.6% yoy compared to 40.8% yoy in May, with 1H21 gains at 56.3% yoy. The fastest-growing category was beverages, up 29.1% yoy.

Nevertheless, the relative slow wage growth and elevated youth unemployment are still key hurdles for China’s consumption recovery. China’s real disposable income continued to improve. However, on two-year average, real disposable income grew by 5.2% yoy in the first half, slightly shy of 5.3% real GDP growth.

In June, industrial output growth slowed to 8.3% yoy from 8.8% yoy in May with an average two-year growth of 6.5% and the month-on-month growth was 0.56%. In 1H21, industrial production rose 15.9% yoy with the average 2-year growth accelerated further to 7.0% in the first half from 6.8% in the first quarter. In terms of sectors, in the first half year, the value added of the mining went up by 6.2% yoy, with an average two-year growth of 2.5%; that of the manufacturing up by 17.1%, with an average two-year growth of 7.5%; and that of the production and supply of electricity, thermal power, gas and water up by 13.4%, with an average two-year growth of 6.0%. The value added of high-tech manufacturing went up by 22.6% yoy, with an average two-year growth of 13.2%.

Helped by strong electronics demand and the reopening of economies, China’s industrial production is already above its pre-COVID growth pace. Although external demand outlook remains positive, supply bottlenecks and higher commodity prices may dampen the gains. Pharmaceutical manufacturing (+32.5% yoy), electrical machinery & equipment manufacturing (+15.0% yoy) and computer, communications & other electronic equipment manufacturing (+13.4% yoy) continued to rise at a relatively fast pace but cars manufacturing fell 4.3% yoy in June.

China’s manufacturing sector continued to recover in the first half of 2021. Share of manufacturing in China’s GDP rebounded further to 27.9% in the first half of 2021, up by 1.3% for the same period of 2020. On production, China’s manufacturing output rose by 7.5% yoy on two-year average in June. Production from advanced manufacturing jumped by 13.2% yoy on two-year average. Capacity utilization rate increased further to 78.4% as of the end of 2Q, up from 77.2% in the first quarter.

Fixed asset investment (FAI) - a gauge of expenditures on items including infrastructure, property, machinery and equipment – grew 12.6% yoy YTD with the average 2-year growth was 4.4% for 1H. In 1H21, primary industry, secondary industry and tertiary industry recorded FAI growth of 21.3%, 16.3% and 10.7% respectively, compared to a year ago. Within the secondary industry, manufacturing FAI rose 19.2% yoy YTD, signalling strong outlook for production and exports. Property investment slowed to 15.0% yoy YTD (May: 18.3%) while infrastructure investment also eased sharply to 7.8% yoy YTD in June from 11.8% yoy YTD in May, reflecting largely the weaker investment growth in railway transportation. In addition, fixed asset investment in manufacturing rose further by 2% yoy in the first half on two-year average after manufacturing investment returned to pre-pandemic level for the first time in May. As a result of strong industrial profit level in the first half of 2021, we expect investment in manufacturing sector to recover further, which will underpin China’s growth in the second half of 2021.

Meanwhile, earlier data released showed China’s exports grew at a much faster than expected pace in June as solid global demand led by easing lockdown measures and vaccination drives worldwide eclipsed virus outbreaks and port delays. Import growth also beat expectations, though the pace eased from May, with the values boosted by high raw material prices. Thanks to Beijing’s efforts in largely containing the pandemic earlier than its trading partners, the world’s biggest exporter has managed a solid economic revival from the coronavirus-induced slump in the first few months of 2019. External demand has remained a key driver for China’s economy and this will help to offset a slower recovery in domestic demand. In USD-terms, export growth strengthened to 32.2% yoy (May: 27.9%) while import growth moderated to 36.7% yoy as the favourable base effect eased (May: 51.1%). Trade surplus was at its highest in five months at USD51.5bn in June, up from USD45.5bn in May. In 1H21, China’s total exports and imports were up 38.6% yoy and 36.0% yoy respectively. The recovery in global demand saw China’s trade surplus up sharply to USD251.5bn in 1H21 from USD164.3bn in year-ago period. The sustained export demand will place China on track for higher trade surplus this year compared to USD526.9bn in 2020. Previous record high trade surplus was USD593.9bn in 2015.

The Consumer Price Index (CPI) moderated to 1.1% yoy in June (May: 1.3%) while core CPI (excluding food & energy) was unchanged at 0.9% yoy. The price pressure has continued to ease as indicated by the continued decline in CPI on a month-on-month comparison, falling 0.4% mom in June (May: -0.2%) in its fourth straight month of lower readings. This was almost entirely due to the food price decline from the preceding month. Food prices fell markedly by -1.7% yoy in June from a gain of 0.3% yoy in May and this pulled down the overall inflation rate by 0.31% point. Non-food inflation strengthened slightly to 1.7% yoy from 1.6% yoy in May. 1H21 CPI inflation averaging just 0.5% yoy.

Producer Price Index (PPI) moderated to 8.8% yoy in June from 9.0% yoy in May. Amongst the producer goods, the gains were led by mining & quarrying (+35.1% yoy), followed by raw materials (+18.0% yoy) and processing (+7.4% yoy). The momentum of PPI increase has eased with month-on-month gains at 0.3% in June, down from 1.6% in May, the slowest since January when it rose at the same pace. PPI has averaged 5.1% in 1H21. Domestic measures to contain commodity price gains may have helped to stabilize the PPI but elevated global crude prices and higher freight costs as pickup in seasonal demand towards year end exacerbates the tight supply chain, which in turn may further contribute to the price pressure. Therefore, PPI inflation is likely to stay elevated in 2H21

Surveyed unemployment rate in urban areas maintained the same as last month and employment was generally stable. In June, the surveyed unemployment rate in urban areas was 5.0%, the lowest since May 2019 when it was at the same rate. China’s real disposable income continued to improve. However, on two-year average, real disposable income grew by 5.2% yoy in the first half, slightly shy of 5.3% real GDP growth. In addition, China’s youth unemployment rate for age group 16-24 rebounded further to 15.4% in June from 13.8% in May due to record number of college graduates. As such, we expect China to rollout more measures to support job markets.

COVID-19 continues to pose risk to growth

The Chinese economy grew 7.9% yoy in 2Q21, showing relative resilience of the world’s second largest economy. The growth rate significantly slowed from 18.3% expansion in the first quarter, however, those figures were skewed due to the low base a year ago.

We do not see the overall economy as being particularly weak in 2Q21. The slower year-onyear growth rate is attributable mainly to the higher base in 2Q20 compared to that in 1Q20. Looking at the other activity data, there was a decent growth in retail sales (12.1% yoy) in June compared to 12.4% in May. Industrial production was not too bad either, at 8.3% yoy in June compared to 8.8% a month ago. Weaker momentum was, however, clearly evident in fixed-asset investment, which registered growth of 12.6% yoy YTD compared to 15.4% yoy YTD. China’s trade may slow in the second half of 2H21, mainly reflecting the statistical impact of the high growth rate last year. But overall, we think China’s foreign trade in the second half still has hopes of achieving relatively fast growth. Headline trade growth was stronger than expected last month, partly thanks to easing shortages of semiconductors. But exports remained below their recent peak and we still think shipments will soften in the coming quarters.

China’s GDP growth rate will continue to normalise in the coming quarters as the favourable base effect diminishes. While the national economy is seeing a sustained recovery and improvement in the first half of 2021, "destabilizing factors" such as evolving COVID-19 remained a threat. With the pandemic induced base effect waning, we expect China’s growth to moderate further in the second half of 2021. Nevertheless, the recent rebound of manufacturing investment is likely to provide the floor for the economy. Overall, our call for 8.2% growth in 2021 remained unchanged.

Source: BIMB Securities Research - 16 Jul 2021