September 22, 2023

China’s economic data likely to show the recovery fading fast

BEIJING (Reuters) – A flurry of economic data out of China on Monday is expected to show that the post-pandemic recovery is rapidly fading, raising expectations that Beijing may soon need to unveil more stimulus measures to support activity and shaky consumer confidence.

After a strong start to the year following the dismantling of COVID-19 harsh measures, recent data points to a strong loss of economic momentum due to weak domestic and international demand and a protracted slump in the country’s real estate market , traditionally a significant growth driver.

The world’s second-largest economy likely only posted growth of just 0.5% in the second quarter compared to three months earlier on a seasonally adjusted basis, according to economists polled by Reuters, with separate data for June expected to industrial production, retail sales and investment will continue to cool.

Some economists have blamed the real estate and technology sectors for the “scarring effects” caused by years of strict COVID measures and regulatory restrictions – despite recent official efforts to reverse some restrictions to support the economy.

With great uncertainty, prudent households and private companies are building their savings and paying down their debts rather than making new purchases or investments. Youth unemployment has reached record highs.

Compared to a year earlier, gross domestic product (GDP) may have grown 7.3% year-on-year in April-June, compared to a 4.5% growth in the first quarter, the economist said.

That reading, however, will be heavily skewed by a sharp slump in activity last spring, when parts of the country were paralyzed by COVID-19 lockdowns.

Data from Thursday showed China’s exports fell the most in three years in June, down a worse-than-expected 12.4% year on year, as declining global demand puts further pressure on the economy.

New home prices remained unchanged in June, the weakest result this year, with increases across the country slowing in continued weakness for the real estate sector, which accounts for a quarter of economic activity.

Producer prices fell at their fastest pace in more than seven years in June and consumer prices teetered on the brink of deflation, data showed earlier this week.

Authorities are likely to enact more stimulus, including fiscal spending to fund major infrastructure projects, increased support for consumers and private businesses, and some easing of property policies, policy insiders and economists said. But analysts say a quick turnaround is unlikely.

China’s central bank will use policy tools such as the reserve requirement ratio (RRR) and the medium-term credit facility to meet the challenges, a senior bank official said Friday.

Analysts polled by Reuters expect the central bank to cut banks’ reserve requirement ratios (RRR) by 25 basis points in the third quarter, freeing up more funds for lending while benchmark interest rates remain stable.

In March, the central bank lowered the RRR – the amount of cash banks are required to hold as reserves.

China also cut its benchmark interest rates by a modest 10 basis points in June, the first such cut in 10 months.

But the central bank will likely be hesitant to cut lending rates further. An unwillingness to borrow from private firms and households means continued policy easing could hurt banks already suffering from margin pressure, analysts said.

Aggressive easing could also lead to more capital outflows from China’s struggling financial markets and put pressure on the yuan, which recently fell to an eight-month low.

(Reporting by Kevin Yao; editing by Kim Coghill)

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