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Chinese Economic Data Faltered in July

Jacob Hess
August 15, 2022

China was weak in July after a strong June. The PBoC confirmed this when it chose to cut some of its rates further in the same day as the release of the economic data (the first cut since January). Weakness that was initiated by the COVID outbreak and restrictions that followed seems to be hard to shake off with credit flowing less freely (fixed asset investment) and consumer activity (retail sales) struggling to continue the rebound.

The real estate sector has been a huge source of the uncertainty in the economy ever since the Evergrande situation. The crackdown on overleveraged firms has created tighter financial conditions in the real estate development business as well as more prudent borrowers. The trend in home prices speaks for itself. Just about every developed nation is seeing double-digit annual growth in housing prices while new home prices were up just 3.1% YoY in July.

As mentioned before, weakness was broad based in July. Retail sales are still struggling despite consumer activity perking up following its decimation in Q1. Sales grew just 0.3% MoM and were up just 2.7% YoY which is a lower annual growth rate than June at 3.1% YoY.

Industrial production suffered as a result of the disruption in the real estate sector. Firms in the building materials and furniture industries have limited production in the last year. Headline industrial production slowed to 3.8% YoY annual growth vs 3.9% YoY annual growth in June. ING points out that semiconductor production is down as well, likely a result of chipmakers expecting demand to slow in the near future.

Chinese Growth Will Be Missed

The data is clear. Chinese growth will be a sore spot in 2022 unless a dramatic turn around occurs in the next 5 months. Downgrades of 2022 GDP growth are cropping up across many financial institutions that have digested new Chinese economic data.

Recently, ING and ABN AMRO have lowered growth forecasts. The Dutch bank revised its forecast for China’s 2022 GDP growth to 4.0% from 4.4% as a direct result of the data and the rate cuts on August 15th. It also suggests that further downgrades could be on deck if trade data is sour. ABN AMRO confirmed the downward revision it made last month as a result of the array of releases. It now sees growth of just 3.7% in 2022, down from 4.2% previously.

Both adjustments follow the pessimistic view on China posited by the IMF in its World Economic Outlook update in July. The report said, “in China, further lockdowns and the deepening real estate crisis have led growth to be revised down by -1.1 ppts, with major global spillovers.” The IMF now forecasts an even lower 3.3% GDP growth rate in 2022, lower than the 4.6% estimated for the Emerging and Developing Asia region.

China is an integral part of global supply chains and a key piece of the global GDP picture. Weakness in its economy will not only affect its region but every continent. Investors should keep a close eye on how the recovery develops in the latter half of 2022 as Beijing grapples with the lingering effects of the pandemic. In the end most will agree, Chinese growth will be missed.

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