China's recent second-quarter economic print made headlines across the world. Bloomberg headlined the news with "China economy slips to record low growth," while the Financial Times noted "China's economy grows at the slowest rate in nearly 30 years." Even US President Donald Trump weighed in, claiming credit for the slowdown.
Indeed, economic growth has slowed from the double-digit rates of the 2000s to more pedestrian, but still enviable, mid-to-high single digits. And given the ongoing trade dispute with the US and the general cooling of growth worldwide, some are sounding alarm bells over China's economic outlook. But while there's clear downward pressure at the moment, we're not too worried.
China's economy is undergoing a structural deceleration. The government has communicated its intention to transition the country toward a services-led economy, rather than a credit-fueled one, and that economic growth will inevitably slow during this period as a result. As such, its official GDP targets have gradually fallen over the past few years and the economy has more or less slowed in line with Beijing's guidance.
The 2Q GDP data (6.2% growth, vs. 6.4% in 1Q) met our and consensus expectations, and we see growth being relatively stable for the coming quarters, meeting the government target range of 6–6.5% for the whole year. Our confidence that the economy will continue to decelerate in an orderly manner – i.e. GDP growth hovering above 6.0% – is based on our belief that the central government will keep the engine whirring through supportive policy.
So far this year, the People's Bank of China has continued to conduct accommodative open market operations and offered lending facilities to keep liquidity conditions relatively stable. The targeted reserve requirement ratio (RRR) cuts for small and medium-sized banks took effect in May, June and July with 100bps each, releasing around a total of CNY 280bn worth of long-term funds. We expect another 100–200bps of broad-based RRR cuts over the rest of the year, along with the use of lending facilities and other new tools.
Furthermore, the Ministry of Finance announced new measures on 10 June to support infrastructure investment. Under the new rules, proceeds from the issuance of special local government bonds (LGBs) can be used as equity capital for eligible major infrastructure projects, primarily nationally supported railway, highway and utility projects. These measures will expand the use of special LGBs and facilitate financing channels for major infrastructure projects. The issuance of LGBs in June recorded a monthly high for this year, bringing net issuance to around CNY 2trn in 1H. The remaining quote (CNY 1trn) is likely to be completed by September.
The authorities have emphasized that they have sufficient policy tools to deal with the pressure from the ongoing Sino-US trade dispute. So we expect further monetary and fiscal policy easing measures over the coming months to counter the pressure from trade tensions and the slowdown in economic growth. This is good news for China's ailing segments: retail sales should remain relatively resilient thanks to personal income tax cuts and consumer subsidies, while fixed-asset investment should stabilize at around 6% y/y thanks to reaccelerating infrastructure investment.
The G20 truce is another positive development, as it should help lift market sentiment – but pressure on exports should stay elevated due to the tariffs and the global economic slowdown. We see a 50% probability that the truce is prolonged given the difficulty the two sides will face finding common ground any time soon. In our view, a comprehensive trade deal, if agreed, may primarily include a removal by the US of the Huawei ban and no further tariff hikes with a conditional rollback of existing measures in exchange for greater Chinese imports of US goods, greater China market openness, stronger IP protection and certain structural commitments.
By UBS
