China enters the slowdown phase

Chinese GDP growth slowed marginally to 6.7% year-on-year (YoY) in the second quarter, from 6.8% previously, with net exports weighing on overall performance.

Though not much to get excited about, we would note that the tranquil path of GDP is not matched by the more violent perturbations of high frequency data, which indicate a more meaningful deceleration occurred.

Policy language is changing, but we think the tightening which has already been implemented will continue to weigh on activity in the third quarter. Easing from the government, and central bank, are expected soon.

GDP growth slowdown more modest than reflected in high frequency data

After a remarkably stable three quarters, in which the economy grew steadfastly at 6.8% YoY, activity seemed finally to slip in the second quarter of 2018. But if we look at the higher frequency data, it seems odd that the change in GDP growth was so muted. Industrial production was perhaps relatively stable, with an average growth rate of 6.4% compared to 6.6% the prior quarter, but retail sales slowed to 9% from 9.9%, investment to 4.8% from 7.5%, and exports to 11.4% from 17%, YoY.

Further policy support in the pipeline

Policymakers had already begun shifting to a more dovish stance, with a change of language from the central bank suggesting easier monetary policy lies ahead.

There have also now been press reports of a more accommodative state approach to investment by indebted local governments, in the now familiar pattern of timid economic reform. Consequently, infrastructure investment, which has been a key driver of overall investment weakness, will likely recover in the coming months.

We also expect easing from the central bank, probably in the form of a headline reserve requirement ratio (RRR) cut as well as additional liquidity support via market operations.

It will take time, however, for a shift in policy to translate to growth, and so we expect a further slowdown in the third quarter before stabilisation in the fourth. We could see a recovery at the start of 2019, but by then growth will be increasingly facing headwinds from the building trade