China GDP Returns to Growth After First Contraction on Record

  • China GDP rose 3.2% in Q2 after declining 6.8% in Q1
  • Supply recovered, but consumer demand lagged
  • Strong performance could lead to policy support reducing sooner
  • Chinese stock rally halted on escalating U.S. tensions, bubble fears

The world's second-largest economy returned to growth in the second quarter of the year, according to official data released today by China's National Bureau of Statistics. It expanded 3.2% year over year, beating analysts' forecasts of 2.5% growth and avoiding a recession, after strict lockdown measures were lifted. It is the lowest positive figure since records began in 1992 and comes immediately after the first contraction ever (-6.8% in Q1). For the first half of the year, GDP was 45,661.4 billion yuan, or 1.6% lower.

The unemployment rate in urban areas has declined 0.2 percentage points to 5.7% in June from May. While industrial output grew 4.8% last month, the service sector and investment continued to decline, but at slower rates. The country also surprised with better than anticipated rebounds in imports and exports for last month. 

Analysts are optimistic about China's second half of the year based on its robust recovery from the pandemic plunge, but there are worries the government will pull supportive policy measures sooner than expected or preferred. Consumer demand appears stubbornly slow to bounce back while supply climbs, and the spread of the virus overseas also threatens growth. "Non-medical exports, medium-low end consumption, core CPI inflation are some examples of areas of the economy which remain weak," said Goldman in a note. There are also those who mistrust government GDP figures from China and say that the deeper underlying data isn't good. 

Despite positive economic data this week, the rally in Chinese stocks has screeched to a halt as tensions with the U.S. escalate over multiple issues including Hong Kong, COVID-19, the South China Sea, Huawei, Taiwan etc. Chinese state-owned media has accused the U.S. of trying to isolate it and come in the way of its development. We've even seen the terms "Cold War" and "Economic Decoupling" being used to describe the direction the relationship is headed in.

Chinese President Xi Jinping wrote a reply letter to Global CEO Council members today, assuring them that the country will keep deepening reform and opening up, and provide a better business environment for the investment and development of Chinese and foreign enterprises. 

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