Rebound and resilience

CHINA - Forecast 29 Jul 2022 by FAN Gang and Chunyang Wang

With China still recovering from its lockdowns, GDP grew only 2.5% y/y in H1. A rebound in June lifted Q2 growth to 0.4% y/y. Industrial output rose 3.4% y/y in H1, down 3.1 pps from Q1. Investment growth was 6.1% y/y in H1, down 3.2 pps from Q1, but still 1.2 pps faster than in 2021. Retail sales of social consumption goods fell -0.7% y/y, down 4 pps from Q1. H1 exports were up 13.2% y/y, and are an important force in lifting economic recovery.

PPI was up 7.7% y/y in H1, and CPI increased 1.7% y/y. Low inflation is benefitting from the recovery of supply chains. However, global inflation is soaring, reaching a 40-year high in the United States, thanks to sky-high food and energy prices exacerbated by the war in Ukraine. We expect future inflation pressure to continue to be high, while monetary policy has loosened somewhat. In June, M2 rose 11.4% y/y, up 0.3 pps from May.

The Chinese yuan has been very volatile recently, as we forecast. On May 13th, it hit its lowest level since September 2020, of 6.78 per dollar, and has hovered around that rate ever since. This is in contrast to the yuan, one of the strongest currencies in 2021. The yuan’s exchange rate depends upon the relative shape of the U.S. and Chinese economies. The Chinese economy is recovering without a major stimulus, while there are fears that U.S. economy will fall into recession. We expect the yuan to hover in the 6.7 to 7 zone for the next few months.

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