Stocks in China sank on Monday as the country reported second-quarter economic activity that looked strong on the top line but nevertheless missed expectations and revealed concerns about consumer confidence.
Second-quarter GDP growth came in at 6.3% year over year. Markets had been predicting growth of 7.1%, up from 4.5% in the first quarter. But the year-over-year comparisons are artificially inflated by the poor figures from last year's second quarter, when Shanghai, the largest Chinese city, was suffering through a devastating total Covid lockdown that had multiple negative effects.
China faces a "complex and grave international environment as well arduous tasks to advance reform," according to the analysis from the National Bureau of Statistics of China, which released the figures.
The CSI 300 index of the largest mainland listings fell 0.8%, leaving it in the red for the year to the tune of 0.5%. The quarter-on-quarter growth for the second quarter was just 0.8%, down from 2.2% in the first quarter, a comparison that also benefited from depressed activity at the end of last year.
If you're wondering why Hong Kong stocks aren't moving in sympathy, it's because Typhoon Talim is sweeping south of the city. That has prompted the hoisting of the first T8 signal of the year, just past midnight, indicating that wind gusts may exceed 112 miles per hour. A T8 is enough to shutter businesses and forces the suspension of the stock market, even though it's now all electronic. The T8 fell to T3 at 4:20 p.m. local time, after the close of trade.
I've been handling the smashed bamboo that once formed my fencing and thanking my lucky stars no one was in the back of our garden when two six-foot pieces of guttering flew off our neighbor's roof extension. No severe damage done.
Japanese stocks are also not trading as the country honors Marine Day, a celebration of the oceans.
In China, the damage is of a totally different kind, largely self-inflicted as a legacy of last year's costly, failed attempt to eliminate Covid-19. While there was a bout of "revenge spending" after the restrictions were suddenly lifted in December and factories were quickly ordered back into action, a series of regulatory measures have knocked confidence in industries such as Big Tech and real estate, both key to the country's previously rapid growth.
Slowing global demand is now compounding the problem and is likely to be a factor for the rest of the year. The services sector has been supporting the Chinese economy amid lackluster orders for exports, which has depressed manufacturing activity. However, today's numbers showed a mixed picture in June. Retail sales softened and property activity flagged badly, although industrial production improved.
Nomura notes "inconsistencies" in the numbers, as is often the case with monthly figures. But the pickup in industrial production doesn't mesh with data and numbers that the Japanese bank is getting from private sources.
Tough target to meet
China has set a growth target of "around 5%" for 2023. But its attempts to refocus the economy to "dual circulation," emphasizing domestic consumption and the internal economy rather than exports, are challenged by poor consumer confidence. Talk privately with business owners in China and they'll tell you they're concerned about the state of the economy as well as how supportive the Chinese Communist Party really is of the private sector.
Nomura is maintaining a 2023 growth forecast for China of 5.1%, dipping to 3.9% in 2024. But it notes that markets may need to adjust their expectations lower. To Nomura's chief China economist Ting Lu and his team, it is "clear that growth momentum has been fading rapidly," they state in a note to clients.
All eyes will be on how Beijing responds. "We do not think today's data will prompt Beijing to step up stimulus measures," the Nomura team state. There may be two cuts of 10 basis points in interest rates later this year and more financial support to local governments. "However, these measures may not turn things around due to weak confidence, negative sentiment, the huge fiscal cliff due to the collapse of land sales, clogged transmission channels, a shrinking tool box, slow decision-making on economic matters and conflicts among multiple targets." That's a lot to handle...
It's a legacy of China's rural, agrarian past that the GDP analysis always kicks off with a breakdown of how well the grain crop is looking and what's happening with pork and poultry output. Forget the "world's factory" -- how high are the hogs? There were 435.17 million pigs registered in China at the end of the second quarter, up 1.1% apparently, while 375.48 million pigs met their maker.
In terms of the broader economy, the jobless rate for young people is still a real concern, rising to a record high of 21.3% in June for the working population aged 16-24. That captures recent college graduates, who are struggling to get jobs and feeling robbed of the previous dream of entering the tech sector after a crackdown on Big Tech. The overall jobless rate for all ages is 5.2% as of June.
Deflation concerns arise
A new concern is the prospect that China is on the brink of entering deflation, which as Japan demonstrated during its three "Lost Decades" can be devastating. China's consumer price index for June was flat, basically 0.0%, and down from 0.2% in May. Producer prices fell 5.4% in June compared with a year ago, the ninth straight month of declines and the steepest drop since 2015.
On the technical side, the GDP deflator, a measure of prices for the broad economy, turned negative in the second quarter. Beijing has set an inflation target of "around 3%" for 2023, but economists now expect it to eke out 1% inflation, at best, for the full year.
The Chinese government is desperately seeking ideas for ways to kick start confidence and recharge the economy. Reuters reports that financial regulators have taken the unusual step of inviting major international investment houses for a meeting in Beijing this Friday, seeking ways to encourage foreigners to keep investing in Chinese markets. U.S.-China tensions and U.S. sanctions against a raft of Chinese companies linked to the military are causing a proliferation of investment products that exclude Chinese stocks to avoid any issues for U.S. investors.