China’s uneven recovery
The Chinese recovery is set to gain momentum. After a tough first quarter where GDP shrank 6.8 per cent year-on-year, several sectors are showing clear signs of renewal, with public investment and infrastructure leading the way.
Industrial production was up 3.9 per cent year-on-year in April and 4.4 per cent in May. Infrastructure investment has also rebounded, with growth of 4.6 per cent in April and 11.6 per cent in May. Continued public investment, supported by special bond issuance at central and local government level, should help to sustain infrastructure spending for the rest of this year.
Property investment, too, has shown resilience. Land purchases are rising and we expect property developers to continue to ramp up construction. This is likely to support the ongoing recovery in heavy machinery and other related industrial sectors, such as raw materials, fuels, metals and cement.
The demand side of the economy is picking up more slowly than the supply side
That was the good news. On the downside, other parts of the economy continue to face headwinds – and while the public sector is leading the recovery, the private sector is lagging behind.
Consumer demand is muted at home and overseas. Concerns linger over a potential resurgence of COVID-19, and China-US trade tensions continue. Private sector investment remains subdued, especially in manufacturing. Industrial profits have been recovering at a very gradual pace from the lows seen in the first quarter of the year, but business confidence is down compared with 2019, and inventories of unsold stock are high.
The demand side of the economy is also picking up more slowly than the supply side. There were some brighter spots in recent retail sales figures: discretionary spending for big-ticket items such as cars and household appliances accelerated in April and May. We think this might be driven by the release of pent-up demand. People may be buying cars, in particular, to avoid crowded public transport amid the pandemic.
China retail sector growth
Despite this, however, consumer sentiment remained cautious and overall retail sales continued to contract in May. This is due in large part to labour market pressures. Lockdowns to contain the initial spread of COVID-19 had a significant impact on China’s labour markets. By the end of March, the number of urban employed workers had fallen by more than 6 per cent, or 26 million people, compared with the start of January. Average disposable income per capita in real terms fell year-on-year for the first time since the data has been collected.
Activity may have improved on the supply side, but there remains significant labour market pressure within the services industries. Services sectors such as wholesale, retail sales, and accommodation and catering services account for about 18 per cent of the labour force – more than manufacturing. With a record 8.7 million college graduates and 4.9 million vocational school graduates this year, job market competition is likely to intensify and continue to weigh on income levels.
All this calls for more policy easing to support a jobs recovery. We expect central and local governments to speed up their special bond issuance to support infrastructure investment and to implement the RMB2.5 trillion of tax cuts and fee reductions announced at the National People’s Congress.
Monetary policy should stay accommodative and keep liquidity ample. We also think targeted measures such as government-supported credit guarantees could provide extra support to small and medium-sized enterprises (SMEs) and the sectors hardest hit by COVID-19. Together, these measures could boost jobs, incomes and growth – and support a more even recovery.
The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s) whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Qu Hongbin
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