Economics China Economic Perspectives: Upgrading China's Growth Forecast

China's economy recovered more than expected in Q2. We see a potential slowdown in Q3 & Q4, though activities should continue to improve assuming COVID-19 remains under control in China.

23 Jul 2020

Economic activities rebounded in Q2

Source: CEIC, UBS estimates

The chart shows how China's economic activities have 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.

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