21 August 2019
Trade saves the day for GDP growth in the second quarter. Photo: Bloomberg
Trade saves the day for GDP growth in the second quarter. Photo: Bloomberg

Outlook finer but hold the champagne corks

The number was up but it was still no real cause for celebration. Mainland GDP growth in the second quarter came in at 7.5 percent, a tad above the first-quarter result of 7.4 percent.

Despite the apparent increase, a look at the data suggests the “recovery” is more statistical than real because of the three major contributors to growth, two — investment and consumption — did not do well.

In terms of investment, spending on fixed assets grew by about 17 percent in the second quarter, much slower than first quarter’s 17.6 percent. Growth in investment in the property market slowed down much more dramatically, falling to about 14 percent from 20 percent a year ago. 

Consumption, meanwhile, can only be described as stable. Retail sales of consumer goods grew about 12 percent in the second quarter, slightly better than the first quarter. 

What really saved second-quarter GDP was trade, which staged a remarkable recovery in May and June. Exports increased by 7 percent in May, making amends for the 0.9 percent increase in April and 6.6 percent drop in March. However, imports in May declined by 1.6 percent year on year, compared with the 0.8 percent growth in April and an 11.3 percent slump in March.

Both exports and imports did even better in June. Exports expanded 7.2 percent year on year, the strongest pace in five months, while imports rose 5.5 percent from a year earlier. Net exports over the two months were a big contributor to GDP growth in the second quarter.

But it must also be said that the recovery in trade was largely because a statistical distortion was wiped out. From January to April last year, trade figures were hugely exaggerated by fake trade – hot money flows disguised as trade. These flows built a high base for this year and the distortion ended only after the government clamped down on the practice in May last year. And that’s why this year’s trade growth has improved since May.

It’s still too early to celebrate the trade improvements because we need time to know if the second-quarter growth is solid. But there is also no need to be pessimistic.

China’s manufacturing sector has shown solid signs of improvement, with the purchasing managers index and industrial added-value growth gathering pace in the past few months.

Looking ahead, policy support and improving global markets may help bolster the Chinese economy.
Since GDP growth slowed to 7.4 percent by the end of March, the government has rolled out policies to boost the economy. Collectively called the “mini-stimulus”, these measures included greater investment in rail, affordable housing and agriculture. Their effects are expected to be felt in coming months.

More importantly, the central government has noticeably loosened its monetary stance. Since April, it has twice lowered the required reserve ratio for lenders, marking a major turnabout in its policy direction. Although the ratio cuts were for selected industries and selected lenders, this “targeted loosening” approach is expected to become the norm if economic growth slows again. A central bank official has also said cuts in reserve ratio and interest rates are necessary to stop the slide in GDP growth from worsening. This shows the government is now open to an interest rate cut.

Clearly, the credit situation has improved markedly with the government loosening its tight grip, and such monetary stance will continue in the second half.

In the global market, China’s two major export destinations will recover. In the United States, China’s biggest national export market, there are clearer signs that the economic recovery is becoming firmer. After cold weather cut production and consumption at the start of the year, business activity revived in the second quarter. The purchasing managers index, which gauges manufacturing activity, reached 55.2, well up on the 52.7 result in the first quarter.

US retail sales grew 4 percent year on year from March to May, much better than the 1.6 percent in the January-February period. Rising US consumption is an especially good sign for Chinese exports.
Europe, another major Chinese export market, did not do as well but the continent also is mounting a weak recovery. Its consumption rose in the second quarter and the labor market improved slightly. The scenario points to steady demand for Chinese products.

With China’s trade performance stabilizing and likely to improve, the annual economic growth target of 7.5 percent is well within reach.

The author is an economic commentator.

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The writer is an economic commentator. He writes mostly on business issues in Greater China.

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