I. CHINA’S MACROECONOMIC PERFORMANCE
China’s economic performance rebounded. The official manufacturing PMI in June stood at 50.2, 0.6 percentage points (pps) up from May. Manufacturing PMI of large businesses was 50.2, 0.8 pps lower than in May; that of medium-sized manufacturers was 51.3, 1.9 pps up from May; and that of small ones, 48.6, 1.9 pps up from May.
Growth of industrial production rebounded. In June, the value added of industries above designated scale nationwide grew by 3.9% YoY, 3.2 pps faster than in May, and 0.8% MoM. Specifically, value added by manufacturing increased YoY by 3.4%; that of mining, by 8.7%; that of power, heat, gas and water suppliers, by 3.3%; and that of high-tech manufacturers, by 8.4%. From January to May, the total profit of industrial enterprises above designated scale increased by 1.0% YoY, down 2.5 pps from that of January-April.
Trade surplus widened on strong exports. In June, China’s USD-denominated export value surged YoY by 17.9%, 1.0 pps up from May. Import value picked up by 1.0%, down 3.1 pps from May. June witnessed a total trade surplus of 97.94 billion USD, 19.19 billion USD up from May.
Consumption improved. Total retail sales of consumer goods grew by 3.1% YoY, 9.8 pps higher than in May, and up 0.5% MoM. Specifically, total retail sales of goods grew by 3.9% YoY, 8.9 pps higher than in May; that of catering decreased by 4.0% YoY, down 17.1 pps; and that of automobiles grew by 13.9% YoY, up 29.9 pps. In the first 6 months of the year, total online retail sales nationwide grew by 3.1% YoY, with that of physical goods up by 5.6% YoY, accounting for 25.9% of total retail sales.
Growth of fixed asset investment slowed, with real estate investment still on a downward ride. From January to June, China’s total fixed asset investment grew by an accumulated 6.1%, down 0.1 pps compared with the first five months of the year. Total private investment in fixed assets increased by an accumulated 3.5%, 0.6 pps down from the number for January-May. Specifically, manufacturing investment moved up YoY by an accumulated 10.4%; infrastructure investment in the tertiary industry rose YoY by an accumulated 7.1%, while the investment in real estate development went down 5.4%, 1.4 pps higher than the drop during January-May. In January-June, total floor space of commercial housing sold decreased YoY by an accumulated 22.2%, 1.4 pps lower than the fall during January-May; and the floor space of newly constructed houses decreased by 34.4%, 3.8 pps higher than the January-May fall.
Core CPI remained low and PPI fell back. In June, CPI climbed YoY by 2.5%, 0.4 pps up from May. Specifically, non-food price rose YoY by 2.5%, 0.4 pps higher than in May; food price, up by 2.9% and 0.6 pps higher than in May. Core CPI excluding food and energy inched up by 1.0% YoY, 0.1 pps up from May; PPI grew YoY by 6.1%, 0.3 pps down from May.
II. CHINA’S MACROECONOMIC ENVIRONMENT
Global economic recovery faltered. In June, JPMorgan Global Composite PMI was 53.5, 2.2 pps up from May; JPMorgan Global Manufacturing PMI was 52.2, 0.1 pps down from May. US manufacturing PMI fell from May 56.1 to June 53.0, the Eurozone manufacturing PMI fell back to 52.1 from 54.6, while Japanese manufacturing PMI declined to 52.7 from 53.3. CRB commodity spot prices came down by 2.4% month on month.
Total social financing (TSF) grew faster. June recorded a YoY growth in M1 of 5.8%, 1.2 pps high than in May; that of M2 was 11.4%, 0.3 pps higher than in May. TSF grew YoY by 10.8%, 0.3 pps higher than the increase in May. In June, new social financing of 5.2 trillion yuan was added, 2.3 trillion yuan up from May, including new government debts (government bonds + local government bonds + special bonds) of 1.6 trillion yuan, 0.6 trillion yuan higher than in May, new business debts of 2.7 trillion yuan (including those of local financing vehicles), 1.2 trillion yuan up from May, and new household debts of 0.8 trillion yuan, 0.6 trillion yuan up from May.
The 7-day repo rate rose. The 7-day interbank pledged repo rate averaged at 1.87% in June, 13 bps higher than in May. The short-term liquidity spread represented by the difference between the 3-month Shanghai Interbank Offered Rate (SHIBOR) and 3-month government bond yield rose 2 bps to 0.42% from May; the term spread represented by the difference between the 10-year government bond yield and 1-year government bond yield fell back 2 bps to 0.79% from May; and the credit spread represented by the difference between 1-year AA-grade bond yield and 10-year government bond yield declined to 1.60% by 6 bps from May.
III. NEAR-TERM ECONOMIC OUTLOOK AND POTENTIAL RISKS
1. Covid-19 resurgences across the country will continue to cripple the economy and increase downward pressure;
2. Excessive downfall of the real estate market will drag total credit expansion and stem domestic demand;
3. Financial risks will mount as the economy goes down;
4. Change in external environment will put pressure on exports.
IV. POLICY SUGGESTIONS
1. Reduce the interest rate by 25 bps each time until the employment target and the economic growth goal are reached.
2. Provide fiscally subsidized, new types of bonds and policy loans to boost investment in the public goods and quasi-public goods infrastructure projects with limited returns. Aim at annual growth in infrastructure investment of not lower than 10%.
3. Boost market-based competition on the interest rate of mortgage loans, so as to reduce households’ debt burdens; collect transaction taxes temporarily based on local conditions to avoid excessive house price hikes in some cities.
4. Convert some of the developers’ housing stock into subsidized rental housing, to reduce the developers’ debt burdens.
5. Establish special funds to help market entities battered during the pandemic get back on their feet.
6. Provide 1-year temporary income subsidies for low-income groups, the elderly, newborns, and young children.
