• Consumption Trends – Retail sales growth dropped markedly in July, slowing to 3.6 percent y-o-y from 4.9 percent in June (calculated on a two-year CAGR basis). In addition to the impact of COVID outbreaks on shopping and consumer services, a massive production cut in auto manufacturing caused by chip shortages and slowing new home sales are also weighing heavily on retail sales.  

• Trade Trends – Export growth dipped marginally in July. Declining new export orders, as observed in the monthly Purchasing Manager’s Index (PMI), suggest weakening global demand for Chinese exports. 

Implications for Business

While a slowdown in the 2H has been expected, the sharp and broad-based falloff in July surprised to the downside. Industrial production, fixed asset investment, and retail sales growth all weakened. Readouts from the July Politburo meeting expressed increasing concern about the “unbalanced” and “unstable” recovery, and the mounting array of growth pressures facing the Chinese economy. According to meeting statements, an “accommodative policy stance” will be maintained in the 2H.

COVID outbreaks – most significantly in Jiangsu, Hunan, and Hubei – are partly to blame. These outbreaks are reportedly now contained. The broad slowdown in domestic demand – including household demand, demand for financing by businesses and households, and investment-related demand - are particularly concerning as they reveal structural weaknesses that are now rising to the fore as the abnormal dynamics of China’s COVID recovery “boom” period come to an end – in particular, the outsized export growth and real estate investment of the past four quarters.

Members should watch for pro-growth measures later in the 2H; but, if they come at all, we expect that they’ll be modest. The July Politburo meeting reiterated the leadership’s resolve to continue tamping down on both housing price growth as well as local government debt. The credit constraints, on-going since mid-year 2020, are not likely to be loosened much. Softening growth should be expected throughout the 2H and going into 2022.