BEIJING (Reuters) – China’s economy grew again in the second quarter after a deep depression earlier in the year, but an unexpected weakness in domestic consumption underscored the need for more political support to boost recovery after the impact of the coronavirus crisis.
Asian equity markets and the Chinese yuan CNY = CFXS fell, reflecting in part the great challenges facing the world’s second-largest economy in dealing with the double whammy of the pandemic and the increased tensions with the United States over the trade, technology and geopolitics.
Gross Domestic Product (GDP) rose 3.2% in the second quarter from a year earlier, the National Statistical Office said Thursday, faster than analysts’ forecast of 2.5% in a Reuters poll, when the closure measures ended and policy makers increased the stimulus. to combat the recession caused by viruses.
The rebound remained the weakest expansion on record, and followed a sharp drop of 6.8% in the first quarter, the worst recession since at least the early 1990s.
“As previously noted, policy support remains necessary despite regaining growth momentum,” said Betty Wang, senior economist for China at ANZ Bank.
“The possibility of resurgences in local COVID-19 cases, global economic uncertainty and the deterioration of the China-US relationship pose downside risks to the prospect of H2 growth in China,” said Wang.
Those risks were reflected in part in separate retail data showing that Chinese consumers kept their wallets tightly closed, pointing to an uneven outlook at home and abroad, as many countries continue to grapple with the COVID-19 pandemic, led from the growing infections in the United States.
Although June indicators and GDP figures far exceeded expectations, Rodrigo Catril, NAB’s currency strategist in Sydney, said they also revealed that “China’s consumer lags behind in terms of the recovery story.”
“It is very much a recovery story led by government stimulus, which is very much focused on the industrial side. The consumer remains very cautious. That caution is something that the market is considering in terms of countries where the consumer plays a more important role, so obviously that is also relevant for the United States. ”
Retail sales fell 1.8% yoy in June, the fifth consecutive month of decline and much worse than expected growth of 0.3%, after a 2.8% decline in May.
Loss of domestic jobs has been a consumer concern as many companies struggled to stay in the black.
Wanda Film, for example, the operator of China’s largest cinema chain, which has more than 600 cinemas, warned on Tuesday of a first-half net loss of 1.5-1.6 billion yuan ($ 214-228 million) , after the coronavirus kept its cinemas closed for almost the entire period.
UNITED STATES TENSIONS, STRUCTURAL ISSUES
In the first half of the year, the economy contracted 1.6% from a year earlier, underscoring the radical impact of the virus that first emerged in China late last year and has killed more than 583,000 people in all the world.
The growing tensions with the United States and the pandemic have added to the structural problems that China has faced for years, including demographic changes, overinvestment, low industrial productivity and high levels of debt.
Quarterly, GDP rose 11.5% in April-June, the NBS said, compared to expectations for a 9.6% increase and a 10% decrease in the previous quarter.
The government is expected to offer more support in addition to a series of previously announced measures, including increased fiscal spending, tax relief, and cuts in interest rates and bank reserve requirements.
But debt concerns have kept a check on China’s stimulus. The net fiscal stimulus was released, so this year it totaled just over 4 trillion yuan ($ 571.76 billion), highly restricted compared to the outbreak of spending in other major economies, including the United States and Japan .
The Institute of International Finance estimates that China’s total debt increased to 317% of gross domestic product in the first quarter of 2020, compared to 300% at the end of 2019 and the largest quarterly increase on record.
The industrial economy offered some hope for the nation as it sought to regain its balance, with output in the vast sector increasing 4.8% in June from the previous year, the third consecutive month of growth, the data showed, accelerating from an increase of 4.4% in May.
Investment in fixed assets fell 3.1% less than expected in the first half of the same period in 2019, moderating from a 6.3% decrease in the first five months, while growth in real estate investment also accelerated to 8.5% in June, thanks to The credit boost.
While the International Monetary Fund predicted China will expand 1.0% for the full year, the only major economy that expects to report growth in 2020, many analysts warn of the prospects.
“Domestic demand will drive China’s recovery, but external demand could be a risk to growth prospects given the possibility of a large second round of coronavirus infections abroad,” said Oshimasa Maruyama, chief market economist at SMBC. Nikko Securities in Tokyo.
($ 1 = 6.9959 Chinese yuan renminbi)
Reports from Kevin Yao, additional reports from Stella Qiu and Yawen Chen; Editing by Shri Navaratnam
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