By Vishnu Varathan, Head, Economics & Strategy, Asia & Oceania Treasury Department, Mizuho Bank, Ltd.,
Between Cradles & Boats
The buckle in 10Y UST yields to 1.3% may then have reinforced a flight to safety that knocked back equities and commodities (in a perverse feedback mechanism).
Consistent with this “risk off” theme;
- USD/JPY slipped to test sub-110, setting the bar higher for BoJ doves.
- EUR is testing 1.18 support and;
- USD/SGD is buoyed above mid-1.35.
Commodity weakness and Covid lockdown drowned out firm jobs data to knock AUD back towards 0.74.
Despite what was widely viewed as robust China GDP/activity data, whispers of worry in terms of the outlook amid “variant risks” and policy dissonance may rock boats instead of cradles.
Three Take-Aways From China’s Q2 GDP
For all intents and purposes, China’s recovery is not just intact, but resilient even. That 7.9% YoY Q2 GDP was a tad hair short of 8.0% consensus merely split hair over decimals.
For not only was H1 growth in line with 12.7% expectations, but YoY momentum in June retail sales (12.1% vs 10.8%), IP (8.3% vs. 7.9%) and FAI (12.6% vs 12.0%) beat consensus.
Yet headlines conceal key moving parts in China’s recovery and attendant policy implications.
First, for all the encouraging signs a durable and robust , the larger picture is that the recovery momentum is in fact fading; and set to ease well below ~8% rates.
Point being, the cyclical upswing from global re-opening globally, which boosted tailwinds from China’s activity recovery since Q2 last year, is set to fizzle.
Even taking into account spasms of from Covid variants that may cause demand recovery to sputter in H2, thereby inducing more volatility in sequential growth, the broader story of structural growth factors levelling China’s growth momentum back to 5.5%-6.0%.
Which is to say, broad overheating risks are not the overarching concern; especially given that the industrial buffers and spare capacity can absorb transitory cost push pressures.
Second, the drivers of growth in China remain appreciably uneven.
Once distortions from a low base are backed out, it is clear that retail sales remains weak; well below the recovery levels attained in industry and investments (in fixed assets as well as property).
What’s more, the property sector remains a disproportionately large driving force behind the economic momentum, whereas underlying consumption momentum. What this means is that policy-makers in Beijing are confronted with a two challenges. One is boosting consumption to ensure that the “dual circulation” that requires domestic demand, does not falter.
The other, to keep property bubble and financial stability risks in check.
Third, uneven and dissipating recovery momentum warrants that China’s policy response be acutely targeted and appropriately fluid to navigate the cyclical bumps as well as the wider structural impediments (and geo political risks).
And so, markets should not be wracked by perceptions of policy dissonance from over-interpreting RRR cuts as China lurching back into easing mode, and then panicking that China’s property tightening is a mercurial swing back to tightening.
Instead, it may help to recognise that keeping financial risks in check (to avoid a Minsky moment), tempering the property market to prevent bubbles/social unrest is wholly consistent with boosting credit access for SMEs for economic support/jobs preservation.
All of PBoC’s varied roads lead to the destination of stable and sustained growth, to ensure the means to attain advantages in new technologies that China deems imperative in a global order where the US is turning up the heat on China’s economy, politics and diplomacy.
Credit: Mizuho Bank Ltd