China’s recovery hits a soft patch

21 June 2021 • 3 mins read

  • China’s activity data in May remained robust compared to a year ago but exports, industrial production, fixed asset investment and retail sales all marginally missed expectations.
  • Exports remain buoyed by strong demand for China’s manufacturing goods as the global economy reopens while retail sales continue to rebound as China’s consumption recovers.
  • But industrial production was only stable and investment is slowing as local governments reduce support with the pandemic easing.
  • China’s V-shaped rebound has thus hit a soft patch. But we see firm exports, manufacturing and consumption and neutral monetary policy still enabling GDP to expand by 8.7% this year.

May’s growth in exports, industrial production, fixed asset investment and retail sales remain robust compared to a year ago at 27.9%, 8.8%, 15.4% and 12.4% respectively as the charts show.

Source: Bank of Singapore, Bloomberg

But the monthly data releases all marginally missed expectations, signaling China’s V-shaped rebound from the pandemic last year has hit a soft patch in the second quarter of this year.

On the plus side, strong foreign demand as the global economy reopens continues to buoy China’s exports and, in turn, spur manufacturing investment within China. Domestic consumption is also recovering as the pandemic wanes inside the country. May’s retail sales expanded by a solid 0.8%MoM.

Source: Bank of Singapore, Bloomberg

In contrast, industrial production rose by a slower 0.5%MoM in May, its same growth as April’s, while overall fixed asset investment only edged higher by 0.2%MoM last month. Property investment is slowing as the authorities tighten regulations. Moreover, infrastructure investment is weakening sharply as local governments borrow less to fund new projects. Local officials see the economy’s recovery from the pandemic requires reduced fiscal support this year compared to last year.

But China’s soft patch isn’t likely to turn in a broader slowdown. Instead, we see economic activity accelerating again, delivering strong full year GDP growth of 8.7% in 2021.

First, exports are likely to remain supported by strong external demand as foreign economies reopen. Second, manufacturing investment is set to stay robust given global demand. Third, consumption is likely to keep recovering as the pandemic eases. Last, May’s tame inflation of 1.3%YoY and May’s slower credit growth of 11.0%YoY will enable the People’s Bank of China to stabilize China’s debt-to-GDP ‘leverage ratio’ without having to lift interest rates. Local governments also have the quotas to borrow more in the second half of the year to fund new infrastructure spending if growth remains soft.

Thus, we expect neutral monetary policy, firm consumption and buoyant exports to let China’s economy still record strong growth for the whole of 2021 despite its current soft patch.

Sim Moh Siong
Commodity Strategist
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