- Gross domestic product growth slowed to 6.2 per cent in the second quarter of 2019 with tariffs of 25 per cent on US$250 billion of Chinese imports remaining in place
- The US president agreed to pause imposing 25 per cent levies on an additional US$300 billion of Chinese imports after meeting Xi Jinping at the G20 summit
US President Donald Trump used his first tweets of the day on Monday to goad China about its slowest gross domestic product growth rate on record, while better-than-expected economic data for June was met with "scepticism" and "caution" by analysts, rather than as a sign of a turnaround in the economy.
China's gross domestic product (GDP) growth slid to 6.2 per cent in the second quarter of 2019, the lowest reading since records began in March 1992, and below the levels reported during the global financial crisis, the National Bureau of Statistics (NBS) confirmed on Monday. The figure, though, fell within the range of Beijing's target growth rate for the year of between 6.0 to 6.5 per cent, and was generally expected.
Monthly economic data for June was better than anticipated with industrial production improving by 6.3 per cent from a year earlier, despite the trade war with the United States. Retail sales growth also surged by 9.8 per cent in June, the highest since March 2018.
But that did not stop the US president taking to his social media account before 7am in Washington, with US tariffs of 25 per cent on US$250 billion of Chinese imports remaining despite the truce agreed between Trump and Chinese President Xi Jinping at the G20 summit in Osaka at the end of June.
"China's second quarter growth is the slowest it has been in more than 27 years. The United States tariffs are having a major effect on companies wanting to leave China for non-tariffed countries. Thousands of companies are leaving," he said.
"This is why China wants to make a deal with the US, and wishes it had not broken the original deal in the first place. In the meantime, we are receiving billions of dollars in tariffs from China, with possibly much more to come. These tariffs are paid for by China devaluing and pumping, not by the US taxpayer!"
China has insisted that all tariffs on Chinese imports added by the US during the trade war must be scrapped as part of any deal to end the year-long conflict, with the truce only seeing the 25 per cent levies on an additional US$300 billion of Chinese imports halted. China's demand would require the Trump administration to give up its position that some levies remain in place even after an agreement is reached.
While Trump focused on China's GDP, which slid from 6.4 per cent in the first quarter, analysts had already reacted to June's seemingly positive data.
….with the U.S., and wishes it had not broken the original deal in the first place. In the meantime, we are receiving Billions of Dollars in Tariffs from China, with possibly much more to come. These Tariffs are paid for by China devaluing & pumping, not by the U.S. taxpayer!
" Donald J. Trump (@realDonaldTrump) July 15, 2019
"(Positive people) might claim that this is a result of the resilience of the Chinese economy and the effectiveness of Beijing's countercyclical easing measures. We recommend caution, as we see no strong signals that China's economy bottomed out in June. And, like the blip of a recovery in March, the rebound of official activity data in June may not be sustainable," economists from Japanese bank Nomura, led by Lu Ting, said.
June's industrial data contrasted sharply with the weak sentiment among manufacturers surveyed in the official purchasing managers' index and declining prices of raw materials captured by the producer price index, which was indicative of weak demand from factories. The data also jarred with declining exports and imports in June.
"We are sceptical of this apparent recovery given broader evidence of weakness in factory activity," said Julian Evans-Pritchard, senior China economist from Capital Economics.
Based on Capital Economics' calculations from the output levels for individual products, Evans-Pritchard said the year-on-year growth of industrial production slowed in June, from 3.2 per cent to 2.9 per cent.
The official figures said that June's industrial growth was largely due to better performances in the mining and manufacturing sectors. Growth in mining increased from 3.9 per cent in May to 7.3 per cent, while manufacturing output went from 5 per cent to 6.2 per cent.
"Looking ahead, we doubt that the better-than-expected data for June will mark the start of a turnaround," added Evans-Pritchard.
Michelle Lam, a China economist from French bank Societe Generale, said that it is hard to attribute the surprising rebound of industrial output to the "front-loading" effect of the ongoing trade war with the US because there is no inventory data available for analysis.
But she did not rule out the possibility that Chinese manufacturers had sped up production of some of the additional US$300 billion worth of goods on which Washington had threatened tariffs to levy new tariffs before they were postponed at the G20 summit.
"In our view, the introduction of value-added tax cuts, summer production caps and the upcoming environment inspections probably caused out-sized distortion to the monthly data. Therefore, we prefer to read the year-to-date figure (of 6 per cent, which also takes into account data revisions), which showed stabilisation (of industrial production), rather than acceleration," said Julia Wang, senior economist at HSBC.
Looking ahead, we doubt that the better-than-expected data for June will mark the start of a turnaroundJulian Evans-Pritchard
Strong retail sales in June were attributed to a 17.1 per cent upturn in car sales, according to the NBS. Improved car sales for a second consecutive month were in part driven by large discounts offered by dealers to clear inventories before new emission standards were introduced at the start of July.
However, in the second half 2019, infrastructure investment is still the key to driving growth, analysts said. In June, infrastructure spend grew by 3.9 per cent, which brought first half of the year growth to 4.1 per cent, but it was still a far cry from the double-digit rate often seen in the past.
Manufacturing investment, meanwhile, has been vulnerable to the uncertainties stemming from the on-off US-China trade talks. Property investment is also likely to slow down, as Beijing recently started tightening offshore financing for mainland developers, analysts said.
"Property is at a very late stage of a cycle. Ideally, policymakers should loosen meaningfully right now, including cutting the benchmark (interest) rate. But it's not going to happen, while policymakers are further tightening the money flows to property developers recently. Therefore any small improvement in recent data should be more like a blip than a trend," Larry Hu, chief China economist from Macquarie Group, said.
"The improvement of data in June strengthens our views that the upcoming Politburo meeting (later this month) will not make any major policy changes and the People's Bank of China will not follow the (US Federal Reserve) cut, despite muted inflation," Hu added.
Other analysts agreed that further easing is less likely now, but could happen should the economy become more stressed later this year.
"Even with fiscal policy turning more supportive again, we think that construction activity will come under pressure in the coming quarters as the recent boom in property development unwinds," added Nomura analysts.
"Combined with increasing headwinds from US tariffs and weaker global growth, we expect this to culminate in a further slowdown in economic growth over the coming year."
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