Nomura Flag Downside Risks To Growth

Nomura note that Chinese “year-over-year activity growth in July may be little changed from June, as a moderation in recovery momentum is offset by a lower base. Weekly growth of auto sales has already slowed after a surge in June thanks to both the lifting of lockdowns and a reduction of the auto purchase tax. A new wave of Omicron appears to have been forming and a rising number of cities are under lockdown, driven by the even more infectious sub-variant BA.5. On the other hand, China’s economy also began slowing in July 2021, which has resulted in a lower comparison base that may support headline year-on-year activity growth in July.”

• “Despite a low base for Q3, we remain cautious on growth outlook in H2, as the spread of the much more infectious Omicron sub-variant across the country could trigger another round of widespread lockdowns, the ongoing homebuyers’ “stopping mortgage repayments” could result in a vicious cycle in the property sector, and a likely synchronized global slowdown could eventually hit the export sector.”
• “Despite a significant rise in credit support from the central government, we expect local government financial conditions to deteriorate further in H2. Land sales revenue growth fell steeply to -65.1% y-o-y in June from -40.4% in May, significantly constraining local government function and infrastructure investment.”
• “We maintain our GDP growth forecasts of 4.0% y-o-y for both Q3 and Q4 but now see risks as skewed to the downside. We believe markets have become overly optimistic about growth in H2 (consensus forecast at around 5.0% y-o-y).”
• “On policies, while Beijing plans to further step up stimulus in H2, we need to appropriately assess the policy impact of such stimulus, as the zero-Covid policy will be largely maintained, the government funding gap is enormous, and Beijing has yet to come up with a real solution for China’s crumbling property sector, which contributes one quarter of China’s economy.”