MNI: China Q2 GDP Tipped At 7%

China’s Q2 GDP read - estimated near 7% - could represent 2023’s peak thanks to the lower comparison base over the same period last year, but authorities will likely implement greater fiscal support and smooth credit transmission over rate cuts to meet the government's 5% annual growth target this year, advisors and analysts told MNI.

China will publish Q2 GDP next Monday, which could print below expectations, according to market watchers. Wen Bin, chief economist at China Minsheng Bank, said industrial output may decelerate to 2.5% y/y in June from May’s 3.5%, while fixed-asset investment in H1 may also record lower at 3.5% y/y, compared to the 4% in the first five months. Wen also expects a considerable deceleration in June retail sales to about 3.3% from May’s 12.7%, due to a slowdown in consumer spending as well as the higher comparison base.

Zhang Yongjun, economist at the China Center for International Economic Exchange, expects Q2 GDP to register about 7%, which could lift H1 growth to near 6%.

CREDIT TRANSMISSION

Expanding investment and consumption will drive H2 growth, as weak external demand pressures exports, Zhang said. The increase in credit and money supply this year has not entirely fed through to investment and consumption, he said, calling for more refined monetary policy in H2. Rather than cuts to interest rates and the reserve requirement ratio across the board, he thinks local governments should organise meetings between banks and enterprises to bridge their credit needs. Meanwhile, the People's Bank of China should introduce more targeted monetary tools to help direct credit to infrastructure construction and tech-based manufacturing, Zhang added.

Ming Ming, chief economist at CITIC Securities, and a former central bank official, however, believes credit growth will further consume excess reserves in the banking system. He sees room for a 25bp RRR cut, possibly in Q4, when a significant amount of medium-term lending facilities mature.

INVESTMENT

Analysts noted falling real-estate investment cannot reverse easily amid a market downturn, and low confidence and weak profits will limit manufacturing investment. Infrastructure investment, the main growth driver, has also retreated as counter-cycle policy effects fade.

Policymakers may resort to "quasi-fiscal tools" like policy bank-based financial instruments to raise more funds to accelerate infrastructure construction, given the budget has constrained further fiscal expansion, according to Ming, who predicted 5.5-6% growth for 2023.

Zhang, however, argued the central government still has room to add leverage and expand fiscal spending, which could help ease local fiscal pressure and support investment.

CONSUMPTION

Zhang said consumption will plateau in H2 after the rapid recovery following the relaxation of Covid restrictions.

Though spending on services rebounded significantly in the past few months, with catering revenue registering substantial double-digital y/y growth, Ming noted the four-year average growth was only 2.9% – much lower than pre-pandemic levels, attributing to reduced income expectations.

The rebound in the service sector should consolidate with continuous preferential policies ranging from fiscal subsidies, tax and fee cuts to deferred loan interest offered during the pandemic, said Zhang. He suggested authorities should encourage banks to accept a wider range of collateral when granting credit to small- and medium-sized enterprises, such as referring to their revenue and tax records.