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China's GDP growth in Q2 slows to 7.9%

Officials warn of trade slowdown in the second half of 2021

A container ship at the Qianhai Shekou Free Trade Zone in Shenzhen. China's second-quarter growth was underpinned by expanding trade.    © Reuters

SHANGHAI -- China's gross domestic product growth slowed to 7.9% year-on-year in the April-to-June quarter after plateauing at 18.3% in the previous three months, signaling a halt to the V-shaped recovery from the COVID-19 pandemic.

Thursday's figure, published by the National Bureau of Statistics, beat the median 7.7% expansion forecast by 29 economists in a Nikkei poll.

The swift deceleration was underlined by a 0.5% cut to banks' reserve requirements, effective Thursday, which is aimed at increasing lending to small and medium-size enterprises.

Only 26% of Chinese companies surveyed in June predicted a rise in business activity over the next year, down slightly from 28% in February, according to a business outlook by IHS Markit released on Monday. That was lower than the global average of 38%.

The survey blamed risk factors including uncertainty over the course of the pandemic and expectations for higher business costs.

China's second-quarter growth was underpinned by exports as its trading partners eased lockdown measures and vaccination drives picked up steam. In dollar terms, exports grew 31% while imports jumped 43% despite sporadic coronavirus outbreaks in the manufacturing powerhouse of Guangdong Province.

But Chinese customs officials warned that trade might slow down in the coming months due to the effects of high growth last year and ongoing uncertainties brought by the pandemic.

On a quarterly basis, the world's second-largest economy posted slower growth of 1.3% in the second quarter, reflecting the uneven recovery across economic sectors.

Industrial production expanded by 8.9%, down from the 24.5% rebound recorded in the first quarter. The slowdown was brought on a decline in mining, but partly offset by high-tech manufacturing. Growth in sales of consumer goods, a barometer of household spending, cooled to 13.9%, down from 33.9% in the first quarter.

In the first half year, GDP jumped 12.7%, underpinned by investment in fixed assets, which grew by 12.6%. Growth was helped by investment in infrastructure and manufacturing, notably in high-tech industries. China's unemployment rate in urban areas remained at 5% in June, unchanged from the previous month and 0.7% lower than the same period last year.

The government forecasts 6% GDP growth for the full year in 2021.

NBS spokeswoman Liu Aihua said that while the national economy is seeing a sustained recovery and improvement in the first half of 2021, "destabilizing factors" such as evolving COVID-19 remained a threat.

"We need to ... deepen structural reform, drive domestic demand and vigorously assist businesses to maintain growth within a reasonable range," Liu said.

Liu echoed the recent assessment of Premier Li Keqiang, who warned of "new things and problems occurring in cross-cycle regulation," citing the impact of surging commodity prices on business. Li addressed a forum of economists and entrepreneurs on Monday, urging continued efforts to keep the pandemic in check and to guard against potential cyclical risks to sustain growth.

Laborers work at a construction site in Shanghai on July 12.   © Reuters

The government is battling sporadic outbreaks of COVID-19 in Yunnan Province, which recorded five local cases on Wednesday. China has administered over 1.4 billion doses of vaccines as of Tuesday. The government aims to achieve herd immunity, vaccinating 70% of the population, by the end of the year.

"China's Q2 GDP data continues to indicate uneven recovery," Yue Su, an economist at the Economist Intelligence Unit, said in a research note on Thursday. Su identified domestic demand as the weak link, noting that retail sales have yet to return to pre-COVID-19 levels due to lethargic income growth.

"These factors all outweigh consumption because households have limited money and time to spend. Reviving domestic demand will be challenging, as unemployment has stopped decreasing for two months. Thus, we expect in the coming months bank lending will favor large employers," Su said.

Despite the slowdown, growth is on track, say economists at HSBC Global Research, with a rebalancing toward private demand-driven growth. The cut in banks' reserve requirements on Thursday should be seen as support for the "weak links in the growth recovery," and not as sign of a reversal of monetary policy by Beijing aimed at arresting the growth slowdown.

The central bank's unexpected decision, which released 1 trillion yuan ($155 billion) of liquidity, fueled speculation about further monetary easing.

Economists at Nomura said another cut is unlikely this year. "We believe the People's Bank of China will rely more on its lending facilities, such as the medium-term lending facility, relending and rediscounting to provide long-term liquidity, if necessary, to cope with the incoming increase in government bond issuance and [to] offset the pain from higher commodity prices for the real economy," Nomura wrote on Thursday.

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