Nomura

China: Estimating recovery momentum from the supply side

  • Despite China being the first country to be affected by the Covid-19, it is also the first major economy to open up.
  • Due to a new wave of cases, the estimate for Q3 and Q4 GDP growth forecasts are lowered due to rising uncertainty and strong headwinds as a new wave of cases emerges.
  • The Chinese economy is still a long way away from a full recovery, and it is too early for the PBoC to reverse its stance on policy easing.

China was the first country to be affected by Covid-19. However, due to the implementation of draconian measures to contain the virus, such as citywide lockdowns and closing airports to foreign visitors, it is also the first major country to reopen its economy. Since mid-March, China’s economy has staged an impressive comeback, bolstered by pent-up demand, a catch-up in production, a surge in medical product exports and stimulus in both China and other major economies which has bolstered demand for goods made in China.

By tracking and analyzing high-frequency data, our estimate for Q2 real GDP growth has risen from 1.2% to 2.6% y-o-y. Of late, China has posted better-than-expected power production, sales of some capital goods such as excavators and heavy-duty trucks, new home sales, property investment, auto production and sales, and government expenditure. At the rate with which production is growing, China’s economy is clearly recovering with strong momentum from the pandemic.

However, we also lower our Q3 and Q4 real GDP growth forecasts to 4.3% and 4.5% y-o-y, respectively, from 4.5% and 5.0% on rising uncertainty and as strong headwinds remain. We accordingly raise our 2020 annual real GDP growth forecast slightly to 1.5% from 1.3%. With the global number of cases continuously rising, and Beijing reimposing lockdown measures in light of a new wave of cases, uncertainty in H2 is becoming dubious and recovery momentum is likely to weaken. Additionally, exports could significantly fall while demand for medical exports will peak. With added social distancing and rising US-China friction, the latter’s exports could also be affected.

GDP growth, till now, has been forecast using estimated demand-side data with focus on certain cyclical sectors driving change in GDP growth and assuming that the services sector followed a stable growth path. However, as the services sector has been hit the hardest due to the pandemic, we would have to take a different approach. Thus, we employ a different methodology by tracking data that are highly correlated with sub-sectors in the primary, secondary and tertiary sectors.

With regards to policy, markets may have recently become overly concerned about an imminent monetary tightening. In our view, the economy is still far from a full recovery, and it is too early for the People’s Bank of China (PBoC) to reverse its easing stance. Also, the PBoC will likely play a larger role in supporting the government to implement its stimulus package.

In our view, the only change to the demand stimulus from previous efforts is that Beijing will now likely focus exclusively on infrastructure rather than the traditional trio of infrastructure, properties and autos. Historically, stimulus in the property sector played a central role during easing cycles, but this time Beijing seems unlikely to risk another housing bubble in large cities.

For a more in-depth analysis of sector breakdown, read our full report here.

Contributors

  • Ting Lu

    Chief China Economist

  • Lisheng Wang

    China economist

  • Jing Wang

    China economist

Suggested views

Back to top icon-back-to-top-arrow