China’s economy slowed more than expected in July, further indicating that the global recovery is under pressure as the delta virus variant disrupts the supply chain and weakens consumer confidence.

Retail sales were hit by strict new virus restrictions introduced at the end of this month to contain the new epidemic. Flooding and chip shortages in central China have caused weak car sales to damage manufacturing, while a slowdown in the real estate market and environmental protection policies have reduced steel and cement production, hitting demand for commodities.

In addition to the drop in US consumer confidence to the lowest point in the past decade and the increasing pressure on Southeast Asia’s supply chain, China’s data highlights the potential damage that a more contagious variant of the delta virus could cause to global recovery. Last week, a major container port in China was partially closed due to an infection of a worker, and trade was interrupted during the Christmas holiday shopping season.

“If China’s economic growth loses momentum amid the recovery of Covid-19, then the growth momentum in the rest of the world may face further headwinds, from supply chain disruptions to lower-than-expected normal consumption,” Bruce, head of macro and strategic research Pang said in Huaxing Securities Hong Kong.

The slowdown in China’s economy also means weaker demand for global commodities. Oil prices fell for the third consecutive day, and West Texas Intermediate crude oil fell 2%. Shanghai copper futures closed down 0.4%, reversing an earlier gain of 1.3%.

The main highlights of China’s July activity data:

  • Retail sales increased 8.5% year-on-year, and the median estimate was 10.9%
  • Industrial production increased by 6.4% year-on-year, while the median estimate was 7.9%
  • Fixed asset investment from January to July increased by 10.3% year-on-year, while the median estimate was 11.3%
  • The unemployment rate rose to 5.1% from 5% in June
  • Using two-year average growth to exclude the base impact of the pandemic, the data showed that retail sales slowed significantly to 3.6% in July. Due to strong exports, industrial production was less affected by the slowdown in consumption. It increased by 5.6% on a two-year basis, a decrease of nearly 1 percentage point from the previous month. The growth of investment in fixed assets was basically stable.

“July data shows that the economy is losing momentum quickly,” said Raymond Yeung, chief economist for Greater China of Australia and New Zealand Banking Group, which lowered its full-year growth forecast to 8.3%. “The resurgence of delta also added additional risks to the August event.”

China’s prospects now depend on whether Covid restrictions can be relaxed this month, and whether Beijing will increase monetary and fiscal stimulus measures to prevent a further slowdown in the economy. The People’s Bank of China issued a stabilizing policy signal on Monday, maintaining its main interest rate unchanged, and at the same time renewing most of the policy loans that are about to expire.

The yield on China’s benchmark 10-year treasury bond rose by 1 basis point to 2.89%. The Shanghai and Shenzhen 300 Index rose by 0.6% at one time, and then gave up gains later in the day.

What Bloomberg Economics Says…
The generally lower-than-expected economic activity in China in July does not mean that the recovery is derailing. The weakness is concentrated on consumption, reflecting the blow of the delta variant. The impact on demand may be even greater in August, even if there are signs that infections may begin to peak. But the sudden drop in production speed may be temporary. -Shu Shu and Eric Zhu

In July, imported delta cases began to appear in the eastern city of Nanjing, leading the authorities to close tourist attractions and cancel cultural activities and flights during the summer vacation to control the epidemic. Although more than half of the population has been vaccinated, China’s continued tough policy to eliminate Covid is hitting consumption: restaurant spending in July fell by more than 4% from the previous month.

The government’s aggressive Covid strategy may be economically costly. Financial institutions such as Nomura Holdings, Goldman Sachs and JPMorgan Chase have lowered their growth expectations for the third quarter and the full year. Even with these amendments, Beijing is still expected to achieve its relatively modest annual growth target of more than 6%.

Industrial slowdown

The production data also reflects the impact of Beijing’s tightening of regulations to curb pollution and real estate market risks. According to Bloomberg’s calculations, steel production plummeted in July to its lowest point in 15 months as the steel industry began to fulfill its promise to reduce production below last year’s record level to curb emissions.

Cement production has fallen for the third consecutive month, indicating that real estate and infrastructure investment, which is driving the rapid recovery of China’s epidemic, will remain sluggish this year.

The factory faced other restrictions in July, including interruptions caused by floods in Henan Province, and continued shortages of computer chips that led to a fourth consecutive month of decline in car production.

Tommy Xie, head of research for OCBC Greater China, said: “We have seen the superimposed effect of China’s decarbonization efforts, as well as the uncertainty caused by Covid and global chip shortages.”

China’s main economic data is calculated based on two-year average growth

  • Retail sales y/y: 3.2% (January to February), 6.3% (March), 4.3% (April), 4.5% (May), 4.9% (June), 3.6% (July)
  • Year-on-year industrial production: 8.1% (January to February), 6.8% (April), 6.6% (May), 6.5% (June), 5.6% (July)
  • Fixed Asset Investment (YTD): 1.7% (1-2 months), 2.9% (March), 3.9% (April), 4.2% (May), 4.4% (June), 4.3% (July)

Fu Linghui, spokesperson for the National Bureau of Statistics, said that my country will maintain a “stable recovery” in the second half of the year, and the main indicators will remain “reasonable.”

It is expected that policy support in the second half of the year will be mainly in the fiscal aspect. The central bank may inject cash into the banking system to help banks digest local government bonds. The Politburo, the ruling Communist Party’s elite, set economic priorities for the second half of the year last month, promising to increase local government investment.

Lu Ting, chief China economist at Nomura Holdings, said: “We continue to expect a significant slowdown in economic growth in the second half of the year, because Beijing has little room to recover its unprecedented real estate tightening measures.”

Lu predicts that the People’s Bank of China will not cut interest rates this year, and believes that the possibility that the amount of reserves that banks must keep will decrease again this year is less than 50%.


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