Most economic analysts believe China returned to growth in the second quarter after its dramatic contraction at the start of the year, and many are forecasting that it will be the only major economy to grow this year, although probably by a relatively small margin.
HSBC expected GDP growth of 1.2% in the quarter to end-June, but said the pace of recovery remained uneven across different sectors.
Bernard Aw, principal economist at IHS Markit, was more cautious. He said: “The Chinese economy is projected to have expanded at an annual rate of 0.6% during the second quarter, rebounding from the -6.8% slump in the opening quarter… Caixin PMI data showed how the recovery has been fuelled mainly by domestic demand, hinting that further recovery may be limited, especially if external demand remains subdued.”
Sin Beng On, an analyst with JPMorgan Chase in Singapore, tipped China to continue its V-shaped recovery, saying: “We expect the economy to show a significant rebound of 48.8% quarter-on-quarter (or 1.8% on year) in 2Q… the further pickup in the June PMI readings, especially the jump of the Markit service PMI to the highest level in more than a decade, not only suggests ongoing solid momentum in manufacturing activity, but also hints at a broadening of the recovery to the non-manufacturing sectors.”
Huge uncertainties
JPMorgan added: “While the economy is now tracking a strong V-shaped recovery, we do not think policymakers will throttle back credit stimulus as feared in some quarters. First, as the economy still faces huge uncertainties domestically (risk of second wave contagion and difficulties with SME funding) and externally (US-China tension and concerns that fiscal headwinds will slow DM growth), it is too early to dial back stimulus.
“Second, it will likely take a while for service-sector activity to normalise. Services have been the largest creators of new jobs in the last four to five years and employment dominates the government’s agenda. In this year’s National People’s Congress the government dropped the traditional growth target but retained the annual employment target. In addition, new entrants to China’s labour force are predominantly college graduates who are better-skilled for the service sector rather than manufacturing or construction jobs.
“Third, across both manufacturing and services, SMEs are the largest job creators in China. In the face of severe income losses, bankruptcy risk looms large for SMEs. Consequently, they will need substantial credit and fiscal (tax and fee reduction) support.”
China’s policies will remain supportive for the rest of the year to help the economy advance steadily out of the Covid-19 pandemic, a report by China Daily said on Monday.
The People’s Bank of China, the central bank, said on July 10 it will begin to withdraw special measures once the economy steadies, but noted that this did not represent a shift in the overall direction of monetary policy. The policy outlook would remain “prudent and flexible” by focusing on providing appropriate funding to support economic growth in the second half of the year, the PBoC said.
Wang Jun, chief economist at Zhongyuan Bank, said the difficulties faced by smaller Chinese businesses and low-income families may be a drag on the economic rebound in the second half of 2020.
Wang said fiscal policy support needed to intensify in the second half to ensure sufficient funding for major projects and the protection of people’s basic livelihoods. Meanwhile, monetary policy will be more targeted to help lower funding costs for small businesses, as there have been signs of marginal policy fine-tuning by the central bank, he added.
Meanwhile, an AFP poll of analysts from from 11 institutions pegged China’s Q2 growth at 1.3%, it said. These analysts forecast China to be the only major economy to grow this year – partly because it was first to be hit by the coronavirus and thus is likely to be the first to recover.
Full year forecast
China is expected to post 1.7% growth for the full year, according to the economists surveyed by AFP, compared with IMF forecasts of a global contraction.
Growth data for the April to June period will be published on Thursday.
The government essentially shut down the country for months to bring the virus under control, halting factory work, keeping workers at home and limiting travel. But activity has resumed as China largely brought the epidemic under control and ended the lockdown of Hubei and its capital Wuhan in April.
Authorities were able to rein in an outbreak in Beijing last month with relatively limited restrictions.
Xu Xiaochun, of Moody’s Analytics, said mass testing and targeted lockdowns in the capital limited economic disruption, giving investors “quiet confidence that China stands ready to prevent a full-blown second wave of infections as the country continues to reopen”.
High uncertainty
After the economy sank by 6.8% in the first quarter – the first contraction since China began logging quarterly data in the early 1990s (and some say since the 1960s) – the government has focused on stabilising employment and ensuring living standards.
It raised its budget deficit target and set aside one trillion yuan ($140 billion) of government bonds for Covid-19 control, working to prop up businesses hit by the virus fallout.
Oxford Economics’ lead economist Tommy Wu expects China to continue recovering from the second quarter onwards “as it is no longer being held back by supply-side disruptions”, with factories back to life.
Gene Ma, head of China research at the Institute of International Finance, said another factor behind recovery is China’s more industrial-based economy. “Industrial sectors can recover faster than service sectors in the wake of the Covid-19 shock,” Ma said.
Weaker external demand
But Xu said there is high uncertainty ahead: “It remains to be seen how the slowdown in external demand will dampen the recovery.”
External demand has been cooling with the manufacturing powerhouse’s key trading partners hit by Covid-19, renewing officials’ calls for businesses to turn towards the domestic market instead.
Other risks include US-China tensions over issues such as cybersecurity, trade and Hong Kong’s national security law, which threaten to reignite the bruising trade war, said Xu.
HSBC chief China economist Qu Hongbin expects recovery to be “uneven”, with a pick-up in infrastructure and other public investment but the revival of private sector investment to “remain slow”.
Qu added that consumer spending – a vital engine of China’s economic growth – is likely to lag behind the recovery, impacted “in the absence of a sizeable fiscal rescue package for the affected workers and families.”
With reporting by AFP
