According to the results of July, China's economy has shown clear signs of slowing down. The widespread of new Delta strain in the country, as well as deadly floods, have collapsed business operations and doomed production and retail sales to stagnation.
Industrial production in China increased by only 6.4% year-on-year in July, the National Bureau of Statistics (NBS) stated on Monday. Analysts had expected that the volume of industrial output could be slightly lower than the previous month but it would grow by at least 7.8%. In June, this indicator amounted to 8.3%.
Retail sales in the world's second-largest economy rose by 8.5% in July compared to last year, again undershooting the forecast. Analysts had expected the reading to expand by at least 11.5% in July as in June the figure totaled 12.1%.
The high level of exports helped China to boost its economy to the pre-pandemic levels. However, its growth is uneven due to many problems. Last's month figures have once again confirmed this. The economy is slowing down after a sharp rise. Private consumption and investment are rather sluggish. Besides, most Chinese enterprises have faced incredibly high expenditure, while trying to solve supply problems. High commodity prices are weighing on small and medium-sized firms. Currently, in China, smaller companies do not dare to raise prices. However, they will hardly receive profit if they do not hike prices. As NBS reported today, the producer price index in July jumped by 9.0% compared to last year. It is likely to remain high in the future.
The downward pressure on the economy is also intensified by the severe weather that has hit some provinces of China, e.g. torrential rains and floods. Record rainfall in Henan province claimed the lives of more than 300 people. Due to heavy rain in five cities of the central Chinese province of Hubei, local authorities were forced to evacuate almost 6,000 people. At the end of last weekend, this figure was as much as 80,000 people. The extreme weather led to massive power outages and damaged more than 3,600 homes and 8,110 hectares of crops. Total losses are estimated at 108 million yuan or $16.67 million.
The rapid spread of COVID-19 and the new quarantine restrictions also significantly undermine business activity in the country. Asia is currently recognized as the epicenter of COVID-19. A high number of new cases has been recorded in the Philippines, including Vietnam and Thailand. Given the outbreaks of the disease in several of its cities, China is trying to protect the rest of its population by tightening social restrictions. The services sector, in particular, the travel and hospitality sector, reacted to new restriction measures with a noticeable decline. The head of the Asian Economics department at Oxford Economics is convinced that there will be more outbreaks in China in the future. It will pose a great risk to the economic prospects despite the fact that today about 60% of the population has been vaccinated.
Following the weak statistics and negative market sentiment, Asian stock indexes have mostly fallen today. However, they managed to slightly gain at end of trading amid hopes that the Chinese government may introduce some stimulus measures to support the economy.
As for the future prospects, they are also not so bright. More and more analysts are lowering their estimates of China's economic growth in the third quarter. Chinese GDP for the quarter from April to June increased by 7.9% compared to the same period last year. Analysts of the Australian financial group ANZ, after the release of disappointing data for July, lowered their forecast for China's GDP for the current year – from 8.8% to 8.3%. Experts are convinced that the central bank may soften monetary policy.
Expectations of a further reduction in cash arose after the regulator in July cut the amount of cash that banks must hold as reserves.
On Monday, China's central bank injected billions of yuan through medium-term loans into the financial system. Many market participants interpreted as an effort to prop up the economy, although the cost of such borrowing was left unchanged.
