Growth forecast at 1.8% this year
GDP turned in a remarkable performance amid global pandemic, rising 3.2% y/y in Q2. Industrial output was up 4.8% y/y in June, and up 0.4 pps from May, though the growth rate has still not reached its pre-pandemic level, and was down 1.1 pps from Q4 2019. Investment, mostly driven by state investment, was up 5.6% y/y, up 1.7 pps from June.
Exports were up 4.1% y/y in June, achieving positive growth for three consecutive months, averaging 4.5% y/y. Imports were up 6.2% y/y, turning positive for the first time. CPI slightly rebounded, rising 2.5% y/y, up 0.1 pps from May.
The main financial indicators were still strong in June. M2 was up 11.1% y/y, the same growth rate as in May. The still-increasing adjusted M1 rose 7.3% y/y. Savings deposits from non-financial institutions were up 13.2% y/y. The Chinese yuan is predicted to be stable throughout 2020, with the U.S.-China conflict depressing its value somewhat, but that factor offset by China’s so-far strong performance in managing the pandemic.
Housing prices have risen slightly faster since April, with some cities, such as Shenzhen, seeing booming housing growth at 20%. The strong housing market lends support to macroeconomic and financial stability: for example, around 50% of loans in China are directly or indirectly linked to the real estate market. Strong housing investment also shows investor confidence amid domestic pandemic and global economic uncertainties, a key factor furthering the overall recovery.
On July 26th, China recorded 61 COVID-19 cases, the biggest increase since April. Even though such numbers seem insignificant, much evidence shows that COVID-19 might be entering a second phase. This has significantly increased both public and investor sentiments of uncertainty. Our own survey data shows that 30% of Chinese people believe this virus will persist for a long time, adding some uncertainty to the future of recovery.
The market has seen a steady increase in money market rates since early May, and the highest 10-year sovereign bond yield in five months. And although People’s Bank of China Governor Yi Gang signaled a fresh liquidity injection two weeks ago, it is taking an unusually long time to be delivered. We expect the so-far strong growth rebound has made monetary loosening exit early. This is partly in order to avoid asset bubbles, in line with the housing boom in some major cities, and also as seen in the stock market rally.
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