Economic activities rebounded in Q2
Can strong Q2 recovery last?
China's economy recovered more than expected in Q2, thanks to a sharp rebound in domestic demand and better-than-expected exports. With most economic activities rebounding to pre-Covid levels, we see a slowdown in sequential momentum in Q3 and Q4, though activities should continue to improve further with the base case assumption that Covid-19 remains under control in China. Even with much slower q/q momentum, we expect H2 2020 GDP growth to rebound to 5.5-6.0% y/y, as domestic consumption recovers to positive growth territory and property and infrastructure investment remain strong.
Policy to remain supportive but no benchmark rate cut
Since economic activities have not fully recovered to pre-Covid-19 levels even after the strong Q2 rebound and job market pressure persists, we think the upcoming Politburo meeting will likely keep macro policy tones unchanged and policies supportive in H2. That said, the strong Q2 rebound may reduce the government's incentive to ease policies further. Given the PBC's traditionally cautious inclination, we now see little chance of a benchmark deposit rate cut this year. We also think the probability of additional RRR cuts has declined, as the PBC may prefer to use other tools to ensure adequacy of liquidity, though targeted Required Rate of Return cuts could be equivalent to 25 bps of an overall cut in the rest of 2020. We also revise down medium-term lending facility rate cut from 10-20 bps to at most 5-10 bps this year.