China’s June Recovery Is Driven by Production as Weak Domestic Demand Remains the Key Drag: J.P. Morgan
A J.P.
A J.P. Morgan report says China’s economic recovery in June was driven mainly by the production side, while domestic demand remained weak. Consumption, fixed-asset investment and real estate continued to come under pressure.
Exports were strong in the short term but face the risk of rising trade barriers. On the policy front, the focus is on accelerating fiscal execution and putting resources to work. Monetary policy is expected to remain moderately accommodative, but rate cuts are a lower priority.
The report expects third-quarter GDP growth to rebound to 4.3% on a seasonally adjusted annualized quarter-over-quarter basis. It forecasts that July trade data will continue to moderate gradually, while credit growth will experience a seasonal decline. Industrial and consumer growth are expected to remain constrained by structural factors.
The report differs from some market expectations that call for stronger monetary easing. J.P. Morgan argues that the policy focus should be on faster fiscal implementation rather than rate cuts. Its rationale is that the economy’s main problem is insufficient demand, not a shortage of liquidity, making fiscal spending more effective than monetary easing.
Weak domestic demand and the downturn in real estate remain the core drags on growth. Exports have shown resilience, but their sustainability is uncertain. The market has already largely priced in a weak economic recovery, but fiscal execution below expectations could trigger renewed concerns about further downside.
In short, China’s recovery is diverging across sectors: production is strong while domestic demand is weak. The key policy variable is the speed of fiscal implementation, not rate cuts, and there is a risk that domestic demand could weaken further in the third quarter.
The report is negative for consumer and real estate sectors and positive for areas that benefit from fiscal spending, including infrastructure, power grids and water conservancy. If fiscal execution remains below expectations, consumer and property stocks could come under additional pressure.
Key catalysts are: July economic data, including industrial output, consumption and fixed-asset investment, which will test whether domestic demand is stabilizing; the pace of fiscal spending and special local-government bond issuance, which will indicate the efficiency of policy implementation; and real estate sales and investment data, which will help assess whether the sector has reached a bottom.
Exports were strong in the short term but face the risk of rising trade barriers. On the policy front, the focus is on accelerating fiscal execution and putting resources to work. Monetary policy is expected to remain moderately accommodative, but rate cuts are a lower priority.
The report expects third-quarter GDP growth to rebound to 4.3% on a seasonally adjusted annualized quarter-over-quarter basis. It forecasts that July trade data will continue to moderate gradually, while credit growth will experience a seasonal decline. Industrial and consumer growth are expected to remain constrained by structural factors.
The report differs from some market expectations that call for stronger monetary easing. J.P. Morgan argues that the policy focus should be on faster fiscal implementation rather than rate cuts. Its rationale is that the economy’s main problem is insufficient demand, not a shortage of liquidity, making fiscal spending more effective than monetary easing.
Weak domestic demand and the downturn in real estate remain the core drags on growth. Exports have shown resilience, but their sustainability is uncertain. The market has already largely priced in a weak economic recovery, but fiscal execution below expectations could trigger renewed concerns about further downside.
In short, China’s recovery is diverging across sectors: production is strong while domestic demand is weak. The key policy variable is the speed of fiscal implementation, not rate cuts, and there is a risk that domestic demand could weaken further in the third quarter.
The report is negative for consumer and real estate sectors and positive for areas that benefit from fiscal spending, including infrastructure, power grids and water conservancy. If fiscal execution remains below expectations, consumer and property stocks could come under additional pressure.
Key catalysts are: July economic data, including industrial output, consumption and fixed-asset investment, which will test whether domestic demand is stabilizing; the pace of fiscal spending and special local-government bond issuance, which will indicate the efficiency of policy implementation; and real estate sales and investment data, which will help assess whether the sector has reached a bottom.