China: a more upbeat H2 outlook
China continues to lead the global economic recovery as domestic demand boosts industrial production. The secondary sector (mainly manufacturing) was one of the main ingredients in the 3.2% year-on-year growth in GDP in Q2.A resilient property market and the government’s policy support in the infrastructure space have also played an important role. We expect growth in industrial production to remain solid for the rest of the year, although momentum may moderate somewhat as capacity utilisation is already close to ‘normal’ levels.
The recovery in household consumption has been slower, with retail sales continuing to contract in June (-1.8% y-o-y). One bright spot in the consumption space is online sales, which represents more than one third of Chinese retail sales. Online sales rose by 19.0% y-o-y in June, and by 25.7% y-o-y for physical goods alone. These growth rates are already back to levels before the covid-19 crisis and even higher than prior levels when it comes to physical goods.
With the coronavirus under control in most parts of the country, some hard-hit services such as domestic tourism and leisure activities could pick up speed. Indeed, the Chinese Ministry of Culture and Tourism issued a policy notice that aimed to promote the re-opening tourism and leisure-related businesses.
As the economy is back on a solid recovery path, there are signs that the People’s Bank of China (PBoC) is starting to normalise its monetary policy. We no longer expect further rate cuts by the PBoC in the rest of 2020, although cuts to the reserve requirement ratio to support government bond issuance are still likely.
With a solid Q2 GDP report and a more upbeat outlook for the second half, we have decided to revise up our Chinese GDP forecast for 2020 to 1.8% from 1.2%. Our forecast for 2021 remains unchanged at 10.3%. These forecasts, of course, are based on the assumption that there is no further major outbreak of the coronavirus.