China GDP and activity: A mid-year lull, but policy lift likely to follow

Research evidence excerpt

China GDP and activity: A mid-year lull, but policy lift likely to follow

eturned to positive territory and exceeded market expectations (1.0%, Bbg: -0.1%), though this

was partly supported by the base effect. The category breakdown shows ongoing pressure from fading impact of policy support.

Contractions in auto sales and household appliances continued to be key drags due to the halving of auto tax exemptions for the

former and a relatively high base from trade-in programs. Auto sales declined by 16.1% y-o-y in June, remaining the largest single

drag on headline retail sales growth in H1 (chart 3). Although communication appliance sales rebounded to 16.5% y-o-y in June, this

may have been partly driven by price increases reflecting cost pressures linked to AI-related demand (see China inflation, 9 July).

Even though consumer sentiment continues to face pressure due to the property sector drag and labour market pressures (see

China’s cautious consumer, 22 May), more policy support is on the way. Most recently, the government released its 15th Five Year

Plan for expanding consumption, with goals for retail sales of consumer goods to reach RMB60trn by 2030 (implying CAGR of 3.7%)

and to expand services consumption (see China macro tracker, 15 July).

Services consumption has been an outperformer. Services-related retail sales maintained over 5% growth in H1 (5.3% in June)

(chart 4) and some services-related retail sales categories have also shown a revival in June: cosmetic sales rose 12.6% y-o-y,

culture and office related goods rose 12.7%. Looking ahead, we expect funding support should continue to shift towards services

consumption, which still offers significant untapped potential in China. In the medium term, the solution remains focused on structural