Post-pandemic recovery now in a more stable phase

China’s economy has finally stabilised from the pandemic slide, having steadied for a second straight month.

This analysts say is a positive sign that the Chinese economy has stabilised and that the post-pandemic recovery is now on a more stable phase. Growth is slowly rebalancing as the recovery is being led by a property-fueled construction boom and surging industrial production for export.

However, consumer spending remains the weakest link and represents the key to more sustainable growth. The latest economic data on China, released today by its Statistics Bureau, showed a shift toward consumption-driven demand is under way, but at a gradual pace.

The National Bureau of Statistics reports that industrial production rose 6.6 per cent in May on a two-year average basis, which strips out the impact of last year’s pandemic, while retail sales grew 4.5 per cent, about half of its pre-pandemic rate. Investment in fixed assets such as property and land was 4.2 per cent in the five months through May

Data in line with economy stabilising

All of the figures were roughly in line with suggestions that the economy’s growth has stabilised. Bloomberg is reporting Ding Shuang, chief economist for Greater China at Standard Chartered Plc. as saying that “robust industrial production is mostly driven by external demand, while domestic demand still hasn’t recovered to pre-pandemic levels… . Policymakers will be more cautious with the pace of policy normalisation”.

He expects the People’s Bank of China to inject liquidity to ease upward pressure on interest rates, adding that the slowdown in credit growth likely peaked in May.

According to Bloomberg, the relative economic stability means Beijing will continue to deepen efforts to clamp down on economic risks from opaque investments sold by banks, surging property prices in some regions and spiking producer price inflation rather than adding stimulus to boost growth.

Limiting exposure to overseas commodities markets

Earlier today, the Chinese government disclosed that it would release state stockpiles of metals like copper and aluminum. State-owned enterprises have also been ordered to limit their exposure to overseas commodities markets, according to people with knowledge of the matter.

Consumers are still cautious despite coronavirus outbreaks being largely under control for a year and the government on course to deliver one billion vaccines by the end of the week. Spending during a national holiday this past weekend was 25 per cent lower than pre-pandemic levels, according to government data.

“The consumption recovery has not been as strong as people have been hoping for,” Michelle Lam, Greater China economist at Societe Generale SA told Bloomberg. High-end consumption is still out-performing more mainstream goods, suggesting the effects of a K-shaped employment recovery in China.

Fall in unemployment rate

A slight fall in the unemployment rate to five per cent, the lowest level since May 2019, should improve sentiment for workers. There was a slight uptick in retail sales in May from the previous month when measured on a two-year basis.

The crackdown on commodity prices hasn’t yet dented the economy. Mining output in May rebounded from the previous month, while steel production at 99.5 million tons was a monthly record as Beijing urged producers to increase production to curb inflationary pressure.

There appeared to be some progress on a key issue facing China’s economy this year: whether there will be a shift in investment away from the property market, which carries bubble risks toward manufacturing. Manufacturing investment was up 0.6 per cent in January-May on a two-year growth basis, the first time it has turned positive this year.

Private sector investment also significantly outpaced investment by state-owned companies.