China released Q2 GDP data Friday, and—please stay with us—the data were arguably the least interesting thing about it. No, we aren’t dismissing the sharp slowdown to 0.4% y/y, which missed expectations and reflected the economic damage from this spring’s COVID restrictions.[i] Nor are we glossing over continued real estate weakness, which remains a challenge. But the press release itself was a tour de force in political messaging that, when you understand the context, augurs well for economic policy—and growth—over the rest of this year. That, in turn, argues for economic fundamentals continuing to support Chinese stocks’ rebound off March’s lows. Let us discuss.
In countries with strong institutions and independent statistical agencies, economic releases are usually pretty dry. Most won’t even reference government officials, never mind sing their praises. But China is different. So the official release for Q2’s economic data begins not with a dry summary of the results, but a rather poetic statement: “Faced with extreme complexities and difficulties, under the strong leadership of the Central Committee of the Communist Party of China (CPC) with Comrade Xi Jinping at its core, all regions and departments deeply implemented the decisions and arrangements made by the CPC Central Committee and the State Council, responded to COVID-19 and pursued economic and social development in a well-coordinated manner, stepped up macro policy adjustments, and fully implemented a package of pro-stability policies and measures. As a result, the resurgence of the pandemic was effectively contained, the national economy registered a stable recovery, production and demands saw improving margins, market prices were generally stable, people’s livelihood was protected sufficiently with robust steps, the momentum of high-quality development was sustained and the overall social stability was maintained.”[ii]
It is entirely unsurprising to us to see such a statement now, as this autumn’s National Party Congress approaches. Xi, reportedly, is seeking an unprecedented third term as party leader, which would effectively cement him as president for life. Simple logic suggests that is easier said than done when the government’s zero-COVID policy and its many everyday-life and commercial disruptions complicate everyday life. That creates two urgent tasks: easing COVID frustration and helping the economy rebound as quickly as possible without storing up debt problems later. We read this press release as a preliminary declaration of success. The official message seems to be that lockdowns, while difficult, were successful and therefore worth it, and the payoff of a swift economic rebound is here—aided by fiscal stimulus, under Xi’s watchful eye and careful guidance.
Whatever you think of that messaging, the data do suggest a strong rebound took hold in June as Shanghai, Beijing and other major hubs reopened. In Q2, heavy industry grew 0.9% y/y, while services declined -0.4%.[iii] But those figures mask some considerable volatility. The press release describes monthly activity as having “plunged” in April, followed by a decline that “narrowed” in May and a “stable recovery” that took hold in June.[iv] You can see this most visibly in the (relatively new) Index of Services Production: It fell -6.1% y/y in April and -5.1% in May before flipping to a 1.3% rise in June.[v] Industrial production’s recovery began even earlier, flipping from a -2.9% y/y decline in April to 0.7% growth in May and 3.9% in June.[vi] The disconnect between this and services is easily explained: Factories had an easier time adjusting to lockdowns, as they were able to continue operating in a bubble-type environment. In-person services had no such flexibility. But that also primed them for a big, easy rebound once officials let life return mostly to normal.
Stimulus also offered an assist, which we can see in fixed investment data. The National Bureau of Statistics reports fixed investment on a year-to-date, year-over-year basis, and the growth rate accelerated from 1.8% in April to 4.6% in May and 5.6% in June.[vii] That acceleration includes an outright drop in real estate development, which fell -5.4% y/y in the first half.[viii] Picking up the slack? Infrastructure, manufacturing and high-tech services, which got some prominent attention in the release. The message seems to be that the old model of property development and urbanization driving growth is passé—tech is the future, and those who dwell on weak real estate are missing the real growth engine. Always take marketing fluff like this with many grains of salt, but the economy’s ability to rebound despite the struggling property sector does suggest sentiment—which still dwells on residential real estate—remains out of step, implying there is a hefty amount of positive surprise potential.
Looking ahead, more stimulus appears to be in the offing, and not just because the passage we quoted earlier seems to tee it up. Lending data released earlier this week showed that total social financing—the broadest measure of credit—accelerated to 10.8% y/y in June from 10.5%.[ix] That isn’t huge, but there were some positive, noteworthy developments under the hood. The structure of corporate bond issuance changed markedly, for the better: In recent months, most issuance was short-term, but long-term loan demand returned with gusto in June. Local governments continued front-loading bond issuance as well, with the percentage of the full-year quota fulfilled jumping from 55.7% in May to 93.3% in June.[x] This is consistent with the government’s directive to fully deploy infrastructure funds by August (in time for an autumn economic boost), and it implies a rumored pull-forward of next year’s targets is probably happening in order to keep growth humming through year-end. Additionally, Bloomberg reported this week that another round of special-issue local government bonds to fund infrastructure is in the offing, which would provide a pretty major second-half boost.[xi]
In our view, it all seems consistent with prior reports that the central government has stressed the need to meet this year’s growth target of around 5.5% at all costs. It isn’t just about getting the usual growth boost to aid sentiment in the closest thing China has to an election year, but—from our vantage point—trying to help society move on from the pain of lockdowns as quickly as possible, lest unrest linger into the autumn. After all, economic stability is key to social stability, and social stability is key to maintaining one-party rule. A big infrastructure push may not be the most efficient way to stoke growth at this stage of China’s development, but to the extent it gets more money moving through the private economy, it should help grease the wheels, keeping the long-dreaded hard landing at bay once again.
Hat Tip: Fisher Investments Research Analyst Austin Fraser
[i] Source: National Bureau of Statistics of China, as of 7/15/2022.
[ii] “Strong Measures Adopted to Counter the Impacts of Unexpected Factors and National Economy Registered a Stable Recovery,” National Bureau of Statistics of China, 7/15/2022.
[ix] Source: FactSet, as of 7/15/2022.
[xi] “China Readies $1.1 Trillion to Support Xi’s Infrastructure Push,” Staff, Bloomberg, 7/13/2022.
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