China reaction: Q2 GDP marks the start of The Third Plenum

Disappointing Q2 GDP brings questions and worries

China’s economy grew 4.7% yoy in Q2 2024, noticeably weaker than the 5.3% pace in Q1. This missed market expectations of 5.1% and our forecast of 5.0%. The quarterly growth pace slowed to 0.7% qoq from 1.5% in Q1, aligning with our expectations (with the quarterly growth rate for the last three quarters (Q1 2024, Q4 and Q3 2023) revised by -0.1ppt, +0.2ppt and +0.2ppt respectively). Despite the softer-than-expected Q2 GDP, the economy grew by 5.0% in the first half of the year, staying broadly on track to achieve the 5.0% annual growth target.

The slowdown in Q2 is attributed to broad-based economic weaknesses, with the most significant impact from domestic demand. There is a clear shift in GDP growth contributions from final consumption (private and government) to gross capital formation, the latter prompted by stimulus last year to arrest the weakening in activity but highlighting an increasingly unbalanced economy.

Private demand at its softest in recent months

Retail sales in June saw their first monthly decline since the end of 2022, -0.1% mom (+2.0% yoy). Sales of consumer goods rose by only 1.5% yoy, the slowest in the past 12 months, while sales of catering increased by 5.4% yoy, up from 5.0% in May. By commodity, sales of home appliances unwound the five-months consecutive growth, decreasing by 7.6% yoy in June – largely reflected a strong base effect. Sales of automobiles extended the decline to 6.2% yoy from -4.4% in May. Sales of services continued to ease, growing by 7.5% yoy year-to-date (ytd) in June, down from 7.9% ytd in May.

The weak retail sales print is unsurprising given the insufficient policy measures targeting domestic demand. The persistent drag from domestic demand is evident in various indicators, including subdued CPI inflation, soft credit demand, and declining imports. These trends point to pessimistic private demand and increasingly unbalanced economic development. Despite this, Beijing is unlikely to pivot its policy focus in the second half of the year, as the headline GDP growth remains on track.

Property market largely insensitive to policy rescues

Despite substantial support from Beijing in mid-May, property prices continued to decline nationwide. Prices for new homes decreased by 0.7% mom in June, while prices for secondary homes narrowed their decline marginally to 0.9% from 1.0% in May. Annual price declines for new homes extended to 4.9% in June from 4.3% in May, and the secondary market saw prices reduce by 7.9% yoy in June, down from 7.5% in May.

The property market's downturn, despite policy interventions, suggests that Beijing may need to explore other approaches, including boosting the labour market, especially wages, which could meaningfully revive households’ income expectation and boost domestic demand. However, we do not foresee a potential meaningful change in policy direction, and the property market is likely to continue its current trajectory in the near term.

Marginally quicker pace in industrial production and investment

China's industrial production picked up marginally in June, rising by 0.4% mom from 0.3% in May. Although the annual growth rate eased to 5.3% from 5.6% in May, this mainly reflected a base effect. Production growth was led by share-holding and private enterprises, rising by 5.9% and 5.7% yoy, respectively, while state-owned (SOEs) and foreign enterprises lagged, growing by 3.0% and 2.9% yoy, respectively. Manufacturing production drove the headline, up by 5.5% yoy in June from 6.0% in May.

Fixed asset investment (FAI) rose by 3.9% yoy in the first half of the year, easing from 4.0% in the first five months. Our calculations suggest FAI edged up in June, rising by 3.6% yoy from 3.5% in May, mainly driven by manufacturing capex investment, which increased by 9.3% yoy in June from 9.4% in May. Infrastructure investment also held up, though it moderated slightly to 4.6% from 4.9% in May. Real estate sector investment lagged, likely posting another double-digit drop in June from -11.8% in May.

Overall, industrial output and FAIs held up well in June, with some marginal deceleration in annual growth rates likely due to base effects. We expect the overall resilience in industrial output and FAIs to continue supporting GDP growth this year.

Weak domestic demand combined with strong production, but not seem to concern Beijing

Today's data highlight the weak domestic demand in China's economy, contrasting with resilient industrial production led by state-guided investment. This contrast stresses the output gap and economic imbalance. Yet, the KPI for government officials – the headline GDP growth target remains on track, this likely diminishes market hopes for a policy shift or strengthening from the Third Plenum meeting – and potentially the more tactical Politburo meeting later this month. Instead, the meeting is expected to focus on technological innovation (so-called ‘new quality productive forces’), green energy transition, and fiscal and SOE reforms.

The Third Plenum of the Chinese Communist Party, which takes place every five years, opened today in Beijing and will last for four days. Traditionally, the Third Plenum focuses on long-term economic development plans and reforms.