China: activity remained weak, growth to slow in 2Q

Research evidence excerpt

China: activity remained weak, growth to slow in 2Q

in trade, investment and IP data, with the economy

pro-actively rebalancing towards higher-value-added sectors, especially high-tech and

equipment manufacturing. Yet, gains have been concentrated in tech sectors heavily

promoted and supported by public policies, including AI-related industries, humanoids, and

in renewable energy sector, e.g. “new three” products (EVs, solar, batteries). While these

sectors are growing fast and gradually gaining momentum, their growth contribution may

remain limited in the near future, too small to make up the growth shortfall generated by the

severe housing and construction slump and weak consumption. Strong imports appear to be

more related to high-tech buildup efforts and renewed commodity stockpiling, and net trade

could become a drag to near-term growth.

Policy support has somewhat lost steam and become less front-loaded in April and May,

despite a stronger 1Q push, especially for “effective investment”, as shown in strong year-

start infrastructure investment. The lack of projects in reserve, weak local finances, and the

missing private sector enthusiasm may explain the subsequent weaker investment in April

and May. Indeed, not only have the intended multiplier effects yet to materialize from fiscal

support for investment, but there is also a lack of conviction in providing further consumption

stimulus, with waning trade-in subsidies and weak household credit. A possible policy pivot

away from boosting consumption to a focus on infrastructure spending, as we were

expecting, has yet to be seen.

We have revised 2Q growth downwards to 3.3%q/q saar, but we are optimistic that 2H real

GDP growth could be stronger than we projected earlier in the year. Several factors could be

at play.