Central bank

Trimming China’s growth forecast

16 August 2021 • 5 mins read

  • July’s activity data was weaker than expected reflecting new virus-induced lockdowns in China, recent floods, slower credit growth and the worldwide shortage of semiconductors.
  • Retail sales fell last month as outbreaks of the Delta variant and the strict ‘zero-cases’ response of the authorities hurt consumption.
  • Fixed asset investment was also lacklustre in July as tighter lending hit infrastructure and property investment while industrial production was limited by supply bottlenecks.
  • We thus trim our 2021 forecast for China’s GDP growth from 8.7% to 8.2% after July’s data. But vaccinations and local government borrowing should help activity rebound later this year.

July’s data was weaker than expected in China.

First, retail sales contracted by 0.1%MoM as outbreaks of the delta variant led to China’s authorities imposing strict lockdowns. The government’s aim for zero virus cases thus hurt consumption. The chart above shows retail sales in YoY terms fell from 12.1% in June to 8.5% in July.

Source: Bank of Singapore, Bloomberg.

Second, fixed asset investment was also lacklustre, increasing by only 0.2%MoM as tighter lending hit infrastructure and property investment. The second chart shows China’s broad credit growth – as given by total social financing - slowed further in July to 10.7%YoY as local governments continued to borrow less to fund new infrastructure projects.

Source: Bank of Singapore, Bloomberg.

Third, industrial production was limited by supply bottlenecks owing to recent floods and the global shortage of semiconductor chips. Last month industrial production only expanded by 0.3%MoM with YoY growth falling from 8.3% in June to 6.4% in July. The supply constraints also hit China’s exports. The third chart below shows export growth declined last month to 19.3%YoY.

Source: Bank of Singapore, Bloomberg.

We thus trim our 2021 forecast for China’s GDP growth from 8.7% to a still high 8.2% after July’s data. We expect activity, however, will still rebound this year. Vaccinations and strict lockdowns are likely to limit new virus cases, enabling consumption to recover. Economies reopening around the world should keep demand for China’s exports firm and China’s local governments still have the budgets this year to raise borrowing sharply to fund new spending.

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Mansoor Mohi-uddin
Chief Economist
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