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China’s Recovery Weakens as Delta Outbreak Adds New Risks

Published 08/15/2021, 10:24 PM
Updated 08/15/2021, 10:27 PM
© Reuters.  China’s Recovery Weakens as Delta Outbreak Adds New Risks

© Reuters. China’s Recovery Weakens as Delta Outbreak Adds New Risks

(Bloomberg) -- China’s economic activity slowed more than expected in July, with fresh virus outbreaks adding new risks to a recovery already hit by floods and faltering global demand.

All the main data missed forecasts: retail sales expanded 8.5% in July from a year earlier, lower than the 10.9% predicted by economists; industrial output increased 6.4% versus the median estimate of 7.9%; fixed-asset investment grew 10.3% in the first seven months of the year, compared with a forecast of 11.3%. The unemployment rate rose to 5.1%.

China’s most widespread virus outbreaks since last year are weighing on an economic recovery that was already starting to soften into the second half of the year. The new virus cases since mid-July have been linked to the fast-spreading delta variant, prompting yet another round of targeted lockdowns, travel curbs and mass testing across the country.

The government’s aggressive moves to achieve a goal of zero Covid-19 infections could prove economically costly as consumers cut back on spending and supply chains get disrupted. Financial institutions like Nomura Holdings (NYSE:NMR) Inc., Goldman Sachs Group Inc (NYSE:GS). and JPMorgan Chase & Co. (NYSE:JPM) have already cut their growth projections for the third quarter and full year.

“July’s data suggest the economy is losing steam very fast,” said Raymond Yeung, chief economist for Greater China at Australia and New Zealand Banking Group. “The resurgence of delta also adds extra risk to August’s activities.”

On a two-year average basis, which strips out statistical distortions from last year’s pandemic shutdowns, the data show a notable slowdown across the board:

Consumption, especially of services, is taking a knock from the targeted lockdowns. Authorities rushed to close tourist sites, call off cultural events and cancel flights to contain the virus outbreaks since last month.

Factory production faced a number of other constraints in July, including disruptions from heavy rain and floods, a continued shortage of computer chips, faltering demand and environmental curbs.

“Given the continuously evolving global situation of the epidemic, the increasingly complex and severe external environment, and the combined impact of sporadic local outbreaks of Covid-19 and natural disasters on the economy of some regions, the economic recovery is still unstable and uneven,” the National Bureau of Statistics said in a statement.

China‘s benchmark 10-year bond yield fell one basis point to 2.87% after earlier being about two basis points higher on the day. Futures contracts of the same tenor rose after the economic data release.

Adding to the economy’s woes are a slowdown in export growth, rising factory-gate prices and a real estate market that remains subdued given tighter restrictions on the property market. Local governments have also been slow to sell bonds this year, implying a moderate rollout of infrastructure spending.

The government has set a modest growth target of above 6% for this year. The slowdown may prompt economists to lower their growth forecasts for the year, which currently stand at a median of 8.5%, according to a Bloomberg survey.

Policy makers have signaled more targeted support for the economy as they look to cushion the recovery. At a Politburo meeting last month, where economic priorities for the second half of the year were laid out, top leaders pledged more steps to help struggling small businesses, a boost to fiscal spending and providing sufficient liquidity via monetary policy.

Economists now see the chance of more cuts to the reserve requirement ratio for banks in coming months after a surprise reduction in July. Some are even calling on the People’s Bank of China to lower interest rates, though the central bank said in its latest quarterly report that rates were at a “reasonable level” and vowed to avoid flooding the economy with stimulus.

On Monday, the central bank reduced liquidity by only rolling over 600 billion yuan ($92.7 billion) of the 700 billion yuan in 1-year loans that matured, while keeping the rate on the loans unchanged at 2.95%.

(Updates with comments from analysts, more details througout)

©2021 Bloomberg L.P.

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