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China Recovery Losing Momentum in Second Quarter

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Between January and March 2021, China grew 18.3%, while the market was anticipating an 8% expansion between April and June. However, according to the National Bureau of Statistics of China, the Asian giant has lost momentum with a 7.9% growth reported in the second quarter.

Q2 2021 hedge fund letters, conferences and more

Less Room For Growth

The slowdown from the 18.3% increase in GDP registered in the first three months of 2021, does not take the market by surprise.

Experts had predicted the loss of momentum, but Julian Evans-Pritchard, senior China economist for Capital Economics, asserts to CNN that China’s initial recovery was so brisk last year that the country has “basically fully recovered.”

“There’s just a lot less room for it to continue to grow rapidly, so it’s hitting against those constraints, and that’s why we’re starting to see those growth rates weakened quite considerably.”

While in the first quarter of 2020, when the coronavirus was wreaking havoc in Chinese big cities, the economy contracted 6.8%. In the second quarter the blow tailed off and activity grew 3.2%.

The drop in expectations is also attributed to headwinds caused by a rise in commodity prices due to the localized outbreaks of the coronavirus in the country. Also, the chip shortage is exerting pressure on China’s technology and automotive sectors, which have become a source of global concern.

China Recovery Losing Steam

For Jianwei Xu, Senior China Senior Economist at Natixis, it is clear that “China’s rapid economic momentum from last year after successfully containing the local spread of Covid-19 may gradually lose steam.”

“One of the key issues for the second half is how favorable government policies will become after realizing the possible economic slowdown in the future,” he said.

The eyes of global trade are on whether the support of monetary and fiscal policies in the country will be upheld, bearing in mind key statistics from June, such as the 8.3% increase in industrial production, the 12.6% growth in retail sales, and the 16% rise in asset investments.

In this regard, the Popular Bank of China’s (PBOC) broad-based RRR cut and subsequent $154 billion release could be good news for stocks in specific industries, as “it could boost market sentiment in the short term and improve stock market liquidity,” according to UBS analysts Lei Meng and Eric Lin.

Looking ahead says Tang Jianwei, chief analyst at the Bank of Communications, “economic stabilization and risk prevention will be the main tasks for the second half of this year.” The bank has ensured that China has $3 trillion in fiscal capital available in the second half of the year, which means that fiscal spending should accelerate.

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