China - Weak data, the PBoC and the Third Plenum

China Macro: Slowdown in quarterly growth as expected, annual growth disappoints

This morning, GDP data for Q2-24 and June activity data were published. Quarterly growth slowed to 0.7% qoq, from an above trend pace of 1.5% qoq (seasonally adjusted) in Q1 , downwardly revised from 1.6%. This was a bit weaker than consensus (0.9%), but in line with our own forecast. That said, revisions in seasonally adjusted figures in previous quarters resulted in annual GDP growth coming in clearly below consensus expectations including ours, slowing from 5.3% yoy in Q1 to 4.7% in Q2.

All in all, the Q2 GDP figures confirm the slowdown in growth momentum, already observed from the monthly macro data – see our earlier publications. This mainly reflects the ongoing drags from the property sector downturn, which is holding back private consumption and private investment. While export growth has so far held up well, risks on the external front are rising – with trade spats already intensifying following China’s excess supply, and a potential return of Donald Trump to the White House after the US presidential elections in November adding to risks on this front. Following the latest GDP data, we will review our 2024/25 growth forecasts.

Monthly activity data for June also weaker on balance

Meanwhile, the monthly macro data for June came also in weaker than expected on balance, and confirmed that the supply side remains stronger than the demand side. The largest disappointment came from retail sales, with annual growth falling back to 2.0% yoy, following a pick-up to 3.7% in May (consensus: 3.4%). Monthly growth was even negative in seasonally adjusted terms, at -0.1% mom (May: 0.2%). On the supply side, industrial production came in a bit stronger than expected, at 5.3% yoy (consensus: 5.0%, May: 5.6%) and at 0.4% mom (seasonally adjusted, May: 0.3%). Fixed investment slowed in line with expectations to 3.9% yoy ytd (May: 4.0%), with private investment still stagnant but state-led investment growth also coming down in recent months. Property sector data (investment and home sales) remained deeply in contraction territory, once more confirming that the targeted measures being taken over the past months to stabilise the sector have not led to any meaningful improvement yet. The unemployment rate was stable at 5.0%, as expected.

PBoC on hold, as expected; weak data increase likelihood of more support

Just before the release of the Q2 GDP and June activity data, the PBoC left the 1-year policy rate for its medium-term lending facility unchanged at 2.50%. That was in line with consensus expectations including ours. Although we expect piecemeal monetary easing to continue, we think the PBoC is following a cautious approach in terms of timing, also taking into account FX considerations and the historically low profit margins of banks. We see some more room for mini policy rate cuts when we get closer to the first rate cut by the US Federal Reserve, which we expect to take place in September. We see room for further RRR cuts as well. Certainly after the release of the disappointing Q2 GDP data, we think the authorities will also come with further follow-up targeted (fiscal) stimulus measures to stabilise the property sector, support domestic demand and safeguard growth (with the 5% target for 2024 more ‘at risk’ now).

Third Plenum is more about structural reforms than about short-term stabilisation measures

This week, from 15-18 July, the CCP top will meet for the Third Plenum, a once in a five-year policy meeting that focuses on structural reforms. As was communicated earlier, central topic will be Xi’s prevailing strategy of modernisation, high-tech development and productivity. That suggests that the ‘production side’ will be the key focus, although fiscal/tax, housing and welfare state reforms and private sector development may also be on the menu.

What about measures to strengthening the demand side? One should keep in mind, that the Third Plenum typically concentrates on structural reforms, and not on short-term stimulus/stabilisation packages (these are discussed in other meetings, for instance in the State Council). That said, some of the reforms that may be discussed may also bring some relief over time to the key current drags: the ongoing property downturn, distress at several local governments, weak consumer confidence and subdued domestic demand. Think for example of a further easing of the hukou (household registration) system to support urbanisation, a gradual build-up of the social welfare system, or reforms that would bring some relief to distressed local governments and/or property developers. While these are unlikely to result in immediate game-changes, they may shift sentiment somewhat, partly given that general expectations for more policy support have been quite low so far.