China’s economic recovery is underway as consumer comeback remains inevitable

BEIJING (Reuters) – China’s retail sales fell in July, sparking high expectations for modest growth as consumers in the world’s second-largest economy failed to shake warnings about the coronavirus while recovering of the manufacturing sector struggled to pick up pace.

Asian markets pulled back Friday from the disappointing set of economic indicators that raised concerns about the fragility of China’s emergence from coronavirus.

China’s recovery had gained momentum after the pandemic paralyzed enormous swathes of the economy as rising demand, government stimulus and surprisingly resilient export activity returned.

However, July data from the National Bureau of Statistics on Friday showed weaker-than-expected year-on-year industrial production growth and retail sales expanding declines in a seventh straight month. That was somewhat offset by more solid real estate, which showed that recent stimulus support construction.

Some analysts attributed the loss of momentum in the economy to the torrential rains that have flooded southern China since June and several recent COVID-19 outbreaks leading to a partial lockdowns.

“While there may be a modest rebound in some investment activity as the floods deteriorate in the coming months, we expect the subsequent recovery momentum to weaken in H2,” Nomura analysts said in a note, citing factors such as declining upward demand, reduced opportunities for more policy life and increasing US-China tensions.

Industrial output grew 4.8% in July from a year earlier, in line with June growth, but less than a 5.1% forecast.

Retail sales fell 1.1% year-on-year, missing forecasts for a 0.1% rise and following the 1.8% fall in June.

The decline in retail sales was broadly based with clothing, cosmetics, household appliances and furniture declining from June.

A major exception was car sales, which increased 12.3%, reversing from a fall of 8.2% in June.

“Despite limited declines in investment, consumption remained weak, highlighting the continuing economic shock of the coronavirus pandemic,” said Zhang Yi, chief economist at Zhonghai Shengrong Capital Management.

“Given that we are likely to see a resumption of COVID in the autumn and winter, it is not advisable to tighten monetary policy too early and fiscal policy will not remain sufficient.”

China’s China’s nationally unemployed rate in July continued to rise nationally to 5.7%, the same as June.


Recovery aid, however, was investment, driven by the rapid expansion in the real estate sector, with analysts expecting that spending on infrastructure would accelerate in the coming months on the back of government support.

China’s economy returned to growth in the second quarter after a deep decline at the beginning of the year, but unexpected weakness in household consumption slowed the momentum.

Investment in fixed assets fell in January-July by 1.6% from the same period last year, in line with expectations, but slower than a decline of 3.1% in the first half of the year.

July-owned investments grew at the fastest clip since April last year, supported by solid construction activity and easier lending. New house prices have risen slightly more slowly in July than a month earlier.

Infrastructure investment, a strong driver of growth, fell 1.0% year-on-year, and required a decline of 2.7% in the first half.

“Once the floods are over, I believe that reconstruction work for affected areas will stimulate investment in fixed assets and industrial production,” said Iris Pang, chief economist for Greater China at ING.

PHILO PHOTO: People wear protective face masks as seen in a shopping complex following an outbreak of coronavirus (COVID-19) in Beijing, China July 17, 2020. REUTERS / Thomas Peter

Another major risk is the increasingly tense US-China relationship ahead of the US presidential election in November, which analysts say Beijing has asked to concentrate on domestic-driven growth.

“Changes in US-China relations are likely to have an impact on China, as well as on the United States,” Fu Linghui, a spokesman for the Bureau of Statistics, told a news conference.

“We still hope to maintain the equal and mutually beneficial development (in relationships).”

Additional reporting by Colin Qian; Edited by Sam Holmes

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