China GDP Beats Estimates, But June Activity Data Shows Recovery Still Uneven

The world’s second-largest economy rebounded from a historic contraction to grow 3.2% in the second quarter, data out Thursday showed.

Economists were expecting a 2.4% expansion.

The official GDP numbers out of Beijing cap months of improving data which, while signaling a fairly rapid return to something akin to “normal”, nevertheless suggested the recovery remains uneven. There are lingering concerns about both domestic and external demand in the wake of the pandemic, and that’s to say nothing of the multi-front dispute with Washington.

China’s economy posted an unprecedented 6.8% contraction in Q1, as the spread of COVID-19 prompted a draconian lockdown which ultimately subdued the virus. A new outbreak in Beijing was quickly brought under control last month.

In May, officials abandoned the country’s GDP target for 2020, and the PBoC, while avoiding the kind of aggressive, kitchen sink-style monetary stimulus seen across the globe, has eased incrementally over the course of the crisis. The central bank launched a little stealth QE early last month.

Concurrent with the release of Q2 GDP, China delivered June activity data, which came in mixed.

Industrial output rose 4.8% last month, matching expectations, but retail sales fell again, declining 1.8% versus forecasts for a small gain.

Fixed asset investment was generally in line with expectations. The surveyed jobless rate was a lower-than-expected 5.7%.

Although industrial output began posting gains again in April, retail sales have remained subdued, stoking concerns about a disconnect in China’s economy. Colloquially speaking, you can flip the factory switches, but you can’t force people to abandon lingering trepidation from the epidemic which might be curtailing consumption and you can’t do much to stimulate external demand either.

The June numbers will do nothing to dispel those concerns.

“If one takes the number at face value, then it is almost certainly only due to extra supply and not due to any extra demand”, Rabobank wrote Wednesday of the expected rebound in GDP. “And supply going where, exactly? Exactly.”, the bank’s Michael Every went on to quip.

That said, trade data out earlier this week was better than forecast, ostensibly suggesting that both domestic and external demand may be firming. PMIs have rebounded in true “V-shaped” fashion. In fact, the Caixin services gauge rose to 58.4 for June, the highest since April 2010.

All reservations about the reliability of the figures aside, this is what the market has, and this is what folks will trade on. Generally speaking, the numbers appear good enough at first blush.

It’s possible the mood could be dampened by a report in The New York Times suggesting the Trump administration is pondering a sweeping ban for Communist Party officials.

The proposed move “would almost certainly prompt retaliation against Americans seeking to enter or remain in China and exacerbate tensions between the two nations”, the Times wrote, adding that “the presidential proclamation, still in draft form, could also authorize the United States government to revoke the visas of party members and their families who are already in the country, leading to their expulsion”.


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