Lagging house sales and slowing steel production during the first two weeks of July suggest that China’s economic recovery is fragile and likely to fade.
That’s according to BCA Research, which says falling home sales in the first two weeks of July, after a one-off improvement in June, indicate the property market’s fundamentals remain gloomy. Slowing steel production also indicates the recovery is struggling to gain traction, it added.
China’s economic recovery will be more U-shaped this year, failing to repeat the V-shaped resurgence experienced following lockdowns in 2020 during the early part of the pandemic.
“At that time, a quick and strong revival in the property market and exports shored up China’s recovery in [the second half of 2020],” the BCA analysts said. “In contrast, the economy’s progress in the second half of this year will be dragged down by shrinking exports, weak consumption and depressed demand for housing.”
While China’s credit growth recovered in June due to large local government bond issuance, private sector sentiment and credit demand remain sluggish, BCA noted.
No Boost for Infrastructure Investment
Recently announced new financing schemes for infrastructure investment will have little effect, they added. “The basis is that these new funding sources will largely offset a shortfall in local government revenues from this year’s land sales,” they said.
The analysts said the rebound in China’s business activity in June reflected the release of pent-up demand from re-openings after widespread Covid-19 lockdowns in April and May that affected Shanghai, Beijing and other major production centres.
“Despite posting strong growth in June, Chinese exports are facing strong headwinds from weakening external demand,” the report noted. “A contraction in exports is very likely in the second half of this year.”
The analysts said China’s economic recovery is weakened by low domestic demand, and added that renewed rolling lockdowns are likely in view of the escalating Covid-19 cases related to a more infectious Omicron sub-variant.
BCA advised investors to maintain a neutral stance on Chinese onshore stocks and an underweight stance in a global portfolio. “The risk-reward profile of Chinese onshore and offshore stocks in absolute terms is not yet attractive,” the researchers said.
They noted that the Hang Seng Tech index has failed to break above its 200-day moving average. “This entails that the bear market in these share prices might not be yet over,” they said.
- George Russell