No sign of a “big bang” China stimulus

Now that the dust has settled on China’s largely disappointing second quarter national accounts, policymakers have sprung into action with measures. Monday’s announcement from the government’s Politburo pledging support for the economy follows actions by the central bank to underpin the currency. In particular, moves to support domestic demand revealed in the Politburo readout are positive. With a lack of detail on the size of any stimulus, however, it is hard to envisage an immediate and significant boost to activity or markets in the near term.

As a result, growth is likely to fall short of our forecast for 2023, which is currently for growth of 6.5%

We will be keeping an eye out for any further announcements in the coming weeks and on public sector bond issuance in the coming months for clues regarding the size of fiscal support. But as things stand, there is little to suggest that this latest package of announcements will deliver the kind of stimulus that will immediately boost activity and the performance of financial markets.

Activity fell off a cliff from April

The second quarter national accounts published last week was a funny release. Output marginally beat expectations in seasonally-adjusted, quarter-on-quarter (q/q) terms, up 0.8% versus expectations for a 0.5% q/q increase. However, the annual rate of GDP growth fell short of expectations (6.3% vs 7.3%) following revisions to the back data.

These adjustments revealed that output shrank by less previously assumed during the Shanghai lockdowns. Moreover, heavy downward revisions to the month-on-month retail sales data changed the complexion of consumption during the past year.

Either way, the latest batch of data were disappointing and shows that, after a strong start to the year, activity fell off a cliff from April onwards. We did not expect the “sugar high” from reopening to last long given that households had not accumulated large savings during past lockdowns. We did, however, assume that it would run for longer during the second quarter. The back revisions and changes in base effects alone knock about one percentage point off our forecast for growth of 6.5% this year.

Meanwhile, the slump in real estate sales calls into question our expectation that the sector would cease to be a drag on growth in the second half of the year. We will assess these issues during our third quarter forecast revisions that will be published in early September, but we will clearly have to lower our expectations for growth.

Central bank draws a line in sand

How policymakers respond to economic data can be just as significant to the growth outlook. The run of softer data has certainly spurred policymakers into action over the past week or so. We have seen new measures aimed at stabilising the economy and currency, culminating in today’s readout of Politburo meeting for July, being the government’s key decision-making body.

With regards to the renminbi, after weakening by about 5% against the US dollar since the start of the year, policymakers at the central bank appear to have drawn a line sand for the exchange rate at around 7.20/$. The central bank has been setting its daily fixes for the exchange rate at stronger-than-expected rates while also announcing tweaks to its range of counter-cyclical and macro-prudential tools for managing the currency.

Coming into the year, we expected the renminbi to be soft into mid-year in line with a decline in exports, before recovering lost ground into year-end as the US dollar softened and the outlook for trade started to brighten a touch.

The renminbi has been weaker than we assumed into mid-year, but there are early signs that am upturn in the goods cycle could offer some relief in the months ahead.

The implications of recent announcements of stimulus measures are less clear. The Politburo readout was clearly dovish as it noted that the economic recovery will be “tortuous” given that domestic demand is insufficient and the external environment is severe and complex.

It pledged to expand domestic demand, but was light on details about how this would be achieved or the size of any fiscal stimulus package. The government aims to boost consumption of motor vehicles and household appliances, while the line that “housing is for living in, not for speculation” was conspicuous in its absence after the major tightening of policy in the sector in recent years.

As has been the trend in recent years, the announcement of policy measures has so far focused on supply-side support rather than outright stimulus and so far there is nothing to suggest that is about to change. And it is hard to believe that the government will sanction a major housing programme given the difficult long term outlook for the sector.