Chinese economic growth tanks to weakest in 27 years

China's second-quarter economic growth slowed to its weakest pace in at least 27 years, in line with expectations, as demand at home and abroad cooled in the face of a bruising trade war with the United States.

The economy grew 6.2 percent in the second quarter from a year earlier, slower than 6.4 percent in the first quarter, the National Bureau of Statistics said on Monday.

Analysts polled by Reuters had expected the economy to have expanded 6.2 percent, which would be the slowest pace since the first quarter of 1992, the earliest quarterly data on record.

KEY POINTS

• Q2 GDP +6.2% y/y (f'cast +6.2%, prev +6.4%)
• Q2 GDP +1.6% q/q (f'cast +1.5%, prev +1.4%)
• June industrial output +6.3% y/y (f'cast +5.2%, prev +5.0%)
• June retail sales +9.8% y/y (f'cast +8.3%, prev +8.6%)
• Jan-June fixed asset investment +5.8% y/y (f'cast +5.5%, Jan-May +5.6%)
• China Jan-June property investment +10.9% y/y

COMMENTARY

JULIAN EVANS-PRITCHARD, SENIOR CHINA ECONOMIST, CAPITAL ECONOMICS

"A stronger end to the quarter didn't prevent growth from slowing in Q2 and we see more weakness on the horizon... We won't get a detailed breakdown of GDP until tomorrow. But the headline breakdown suggests that the slowdown was driven by industry and construction, with growth in the service sector activity holding steady.

"The monthly data for June was better than expected... But we are sceptical of this apparent recovery given broader evidence of weakness in factory activity. Growth on our own industrial production index, based on the output volumes of individual products, slowed in June, from 3.2 percent y/y to 2.9 percent.

"Looking ahead, we doubt that the better-than-expected data for June will mark the start of a turnaround. Even with fiscal policy turning more supportive again, we think that construction activity will come under pressure in the coming quarters as the recent boom in property development unwinds.

"Combined with increasing headwinds from US tariffs and weaker global growth, we expect this to culminate in a further slowdown in economic growth over the coming year."

FRANCES CHEUNG, HEAD OF MACRO STRATEGY, WESTPAC, SINGAPORE

"The growth in industrial production is particularly encouraging, given the assumed negative impact of trade.

"Investors may be scaling back easing expectation upon today's data as fiscal measures appear to be working, leading to a mild upside bias to IRS.

"That said, we believe the PBoC will still be supportive of liquidity. Expect yields to be stable and any temporary bearishness to be expressed via swaps."

HO WOEI CHEN, ECONOMIST, UOB, SINGAPORE

"Growth was in line with expectations of a slowdown, as there was an escalation of trade tensions, creating a difficult trading environment. However, the June numbers were not as bad as what most people had expected. There was a pickup in industrial production and retail sales. If you look at the seasonally adjusted on-quarter growth, there was also a pickup.

"For the full year, we do still expect a slowdown nonetheless. There is no resolution in sight for the US-China trade tensions. Going forward, the slowdown in trade will have an impact on domestic demand and growth will be at 6.2 percent in the second half.

"Quantitative measures will remain in place. Two-time RRR cuts are expected for the second half, but interest rate cuts are unlikely at this point.

"There is still fiscal room at this point. If they need to, they can cut the VAT rates further. Also, the government has room to drive infrastructure spending."

EDWARD MOYA, SENIOR MARKET ANALYST, OANDA, NEW YORK

"China's swath of economic data shows the slowdown remains intact and markets should expect further stimulus from the PBOC later this summer.

"The trade war is having a huge impact on the Chinese economy, and with no end in sight, as trade negotiations struggle for meaningful progress, we are probably not near the bottom for China's economy.

"While the PBOC has already delivered stimulus this year, markets are awaiting a bazooka of RRR cuts and additional measures which will probably come if trade talks collapse. If talks steadily progress, we will still probably see the PBOC deliver fresh stimulus following the Fed's highly anticipated rate cut at the end of the month."

"Markets should not get worried for Asia unless the PBOC lets GDP fall below 6 percent. The PBOC will probably ease liquidity and deliver a wide range of RRR cuts in the second half of the year to help China's economy."

JIANWEI XU, SENIOR ECONOMIST, GREATER CHINA, NATIXIS, HONG KONG

"The data is in line with our expectations... The number, while not so bad, is still a warning for the Chinese government because the trade war is still ahead of us and we also see that the overall sentiment is bad. We think stimulus is on the way — infrastructure investment on the fiscal side and also the PBOC will be laxer (with regards to) the financial environment."

STEVE COCHRANE, CHIEF APAC ECONOMIST, MOODY'S ANALYTICS, SINGAPORE

"It sounds like if retail sales are up as strong as they are, the domestic side has recovered a bit based on stimulus. So, it all may be temporary, especially if industrial production is only around 5 percent.

"Shifting the reserve requirement down would be an easy thing for the PBOC to do. The trick is to try to channel any additional liquidity towards small enterprises and the private sector where they can do the most good. That may be harder said than done. I also think we are in a wait-and-see mode if the United States and China will get back together again.

"Our primary assumption for the second half is that the talks will resume. If they don't, I would pull my growth forecasts for the second half down."

AIDAN YAO, SENIOR ASIA EMERGING MARKETS ECONOMIST, AXA INVESTMENT MANAGERS, HONG KONG

"There's a lot of talk about support for big item consumption but we haven't seen that coming through and there's been talk about RRR cuts and big monetary stimulus and we haven't really seen any big bazooka being put out.

"They are behaving a lot more cautiously. We do expect more measures to be rolled out. They've certainly done a lot more (liquidity management) over the last few weeks.

"If push comes to shove they have more scope to cut taxes and fees... and they could fulfil market speculation of another round of auto subsidies to boost consumption.

"Fiscal policy is likely to be in the driving seat and monetary policy will act in a supportive role in the coming months.

"Cutting the benchmark deposit and lending rates — the likelihood is very low. It's more possible (that) they twist the market-oriented rates — cutting the interest rates of all those liquidity facilities also sends an important signal to the market."

BEN JARMAN, ECONOMIST, JPMORGAN CHASE, SYDNEY

"These are generally stronger numbers than we had thought. We are seeing a broad upside surprise.

"Policy in China is working under constraints at the moment as they are trying to achieve multiple objectives. They want to support growth via infrastructure and consumer spending, but they are also careful not to re-ignite a housing bubble. So to that extent, it means the pressure is off in the near term to do more on the policy."

BACKGROUND

• China's economy has been slowing since last year as the trade war with the United States took a toll on factory activity, exports and domestic demand, suggesting that a spate of stimulus measures - including tax cuts and easier lending rules - have yet to have a notable effect on overall growth.
• Washington sharply raised tariffs on $200 billion of Chinese goods in May, increasing the strain on a struggling manufacturing sector and threatening to crush already-thin profit margins.
• Though both sides agreed in late June to resume negotiations, and Washington said it would hold off on additional levies, existing tariffs remain in place.
• No time frame has been set for the new round of trade talks, and Beijing and Washington remain at odds over significant issues.
• The government has been leaning more on fiscal stimulus to underpin growth this year, announcing massive tax cuts worth nearly 2 trillion yuan ($291 billion) and a quota of 2.15 trillion yuan for special bond issuance by local governments.
• The People's Bank of China (PBOC) has slashed banks' reserve requirement ratio (RRR) six times since early 2018 to turn around soft credit growth. It has also injected large amounts of liquidity into the financial system and guided short-term interest rates lower.
• But the economy has been slow to respond, and investors fear a longer and costlier trade war between the world's two largest economies could trigger a global recession.
• Markets are eagerly waiting to see whether the PBOC will follow policy moves by the U.S. Federal Reserve, which is widely expected to cut rates at its meeting at the end of this month.
• China's economic growth is expected to cool to 6.2 percent this year, a 29-year low, according to a Reuters poll. The economy grew 6.6 percent last year.