On the heels of an abrupt dovish policy pivot, the outlook for the Chinese economy is the subject of considerable debate.
Last week, the PBoC delivered an RRR cut just two days after the State Council tipped the move. For many, it was a sign that officials in Beijing are concerned about growth headed into the back-half of the year.
Fast forward a few days, and China Securities Journal suggested a loan prime rate cut may be in the cards. It would be the first in 14 months.
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China was, of course, the only major economy that managed to expand in 2020, a state of affairs that left a sour taste in the mouths of many given the pandemic began on Chinese soil. Now, Beijing looks poised to embark on an incremental easing campaign to help support the recovery, a development that’s raised more than a few eyebrows.
Against that somewhat intriguing backdrop, China said the economy expanded 7.9% in Q2 (figure below). That was just shy of consensus (8%). The range was 6% to 12.5% from three-dozen economists.
The numbers come with the usual caveats — the veracity of the figures is questionable, to put it politely. As one analyst quipped, “GDP will be what the CCP wants it to be.” (As an aside, I often wonder how much longer Hong Kong-based analysts will get away with those kinds of jokes now that the city is completely under Xi’s thumb.)
Usually when I bury the lede I’m doing it to be annoying or because once my digital pen starts moving, I have a hard time restraining it. This time, though, I recapped recent events first because I think anyone looking to get a read on the state of the world’s second-largest economy is probably better served by watching the PBoC than scrutinizing last quarter’s GDP figures.
Also note that credit growth in June was quicker than anticipated. The combination of accelerating credit growth and an RRR cut pretty clearly suggests that all pretensions to keeping credit provision “basically stable” aside, Beijing is moving preemptively to support an economy that’s seen flagging.
Meanwhile, activity data for June surprised modestly to the upside. Retail sales rose 12.1% YoY (figure below). Consensus was looking for 10.8%.
For the duration of China’s recovery from the pandemic, analysts have scrutinized the disparity between retail sales and industrial production. There are lingering questions about domestic demand. Thursday’s data may help in that regard. Tepid consumption could make it more difficult for producers to pass on rising factory-gate prices to consumers, assuming they’d be allowed to do such a thing in the first place.
Industrial production rose 8.3% YoY last month, better than the 7.9% the market expected. Fixed asset investment for January through June was up 12.6% and the surveyed jobless rate was 5%.
All in all, I doubt June’s somewhat perky activity data will do much to allay concerns about a decelerating economy. Of course, that’s what policy ammunition is for, and the PBoC has plenty of it compared to its developed market counterparts, almost all of whom are operating at the lower-bound and are still engaged in QE, even as tapering has commenced in a handful of locales.
That’s pretty much the long and the short of it. Now, attention will turn to the loan prime rate later this month. The PBoC conducted 100 billion yuan of one-year MLF Thursday. The rate was unchanged. A portion of the liquidity released by the RRR cut, which goes into effect today, will go towards repaying 400 billion in maturing medium-term funding.
Savvy to follow what is done vs. what is said.