China’s Recovery: A TextBook V

The Chinese economy is still likely to face some challenges in the second half of the year

Sophie Altermatt (Economist, Julius Baer) | The Chinese economy went through an impressive recovery in the second quarter and grew 3.2% compared with the same period a year ago, demonstrating a textbook V-shaped recovery. The return to growth was led by the production side and was driven by catching-up effects, pent-up demand and government support after the fallout in the first quarter due to the impact of the Covid-19 crisis. With consumption still lagging and the recovery momentum slowing, the economy is still likely to face some challenges in the second half of the year.

The strong recovery in the second quarter was mainly led by the production side and supported by government stimulus. Industrial production showed an impressive comeback throughout the second quarter, returning to growth on a year-on-year basis already in April. Growth in production picked up further in June in line with market expectations. However, the consumption side remained rather weak throughout the second quarter. Retail sales have recovered at a much slower pace as consumers remained cautious. Also in June, retail sales were not able to return to growth – disappointing expectations – but improved further compared to the previous month. Car sales slumped and fell back into contraction, while sales growth of communication and home appliances expanded faster than last month. The recovery of investment in the second quarter was mostly led by infrastructure and real estate investment. Manufacturing investment was lagging behind in the first two months of the second quarter but improved in June, while growth in infrastructure investment slowed from May and growth in real estate investment remained unchanged. Overall, private sector investment continued to lag behind public investment, suggesting that the recovery in investment was mostly driven by government stimulus. In general, the speed of the economic recovery slowed in June, as the catching up effects and pent-up demand have started to fade. With consumption still lagging and the recovery momentum slowing, the economy is still likely to face some challenges in the second half of the year.