China's Q2 GDP grows 3.2%, beats expectations

(Reuters) - China's economy grew 3.2% in the second quarter from a year earlier, data showed on Thursday, recovering from a record contraction as lockdown measures ended and policymakers stepped up stimulus to combat the shock from the coronavirus crisis.

The growth was faster than the 2.5% forecast by analysts in a Reuters poll, and followed a steep 6.8% slump in the first quarter, the first such contraction since at least 1992 when quarterly gross domestic product (GDP) records began.

On a quarter-on-quarter basis, GDP rose 11.5% in April-June, the bureau said, compared with expectations for a 9.6% rise and a 10% decline in the previous quarter.

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KEY POINTS

* Q2 GDP +3.2% y/y (f'cast +2.5%, Q1 -6.8%)

* Q2 GDP +11.5% q/q (f'cast +9.6%, Q1 -10%)

* June industrial output +4.8% y/y (f'cast +4.7%, May +4.4%)

* June retail sales -1.8% y/y (f'cast +0.3%, May -2.8%)

* Jan-June fixed asset investment -3.1% y/y (f'cast -3.3%, Jan-May -6.3%)

MARKET REACTION

Asian equities started Thursday with mild losses and remained lower after the release of China data.

COMMENTARY:

RODRIGO CATRIL, FX STRATEGIST, NAB, SYDNEY

"While in general it's fair to say that the numbers beat expectations, what the numbers also reveal is that we're seeing that the China consumer remains behind in terms of the recovery story."

"It's very much a story of government stimulus-led recovery, which is very much focused on the industrial side. The consumer remains very cautious. That cautiousness is something the market is looking at in terms of countries where the consumer plays a bigger role, so that's obviously relevant for the U.S. as well."

TOMMY XIE, HEAD OF GREATER CHINA RESEARCH, OCBC BANK, SINGAPORE

"Frankly speaking, I think this was quite strong and much stronger than my expectations (of around 1%). Given this new information, I think it's a good chance China could try for 3% growth for the full year.

"The key driver has been net exports, not only from a goods perspective but from a service perspective as well. But it is not all bright spots, with retail sales below expectations which I think is partially due to the mini outbreak in Beijing.

"That impact seems more like a one-off, and China has managed to contain that outbreak and seems to be doing quite well. Consumption may gradually recover in the third quarter, with big-ticket items like car sales already recovering in June."

LOUIS KUIJS, HEAD OF ASIA ECONOMICS, OXFORD ECONOMICS, HONG KONG

"The 3.2% y/y expansion of China's GDP in the second quarter underscores the robust recovery that China's economy is going through after the historic contraction of 6.8% y/y in the first quarter.

"We expect the upturn to continue in the second half, supported by improved sentiment after the successful containment of COVID-19 and significant fiscal and monetary policy easing. Export orders have remained weak but given the resilience of China's exports so far, we expect exports to pick up gradually along with the recovery of global demand.

"Our current forecast has GDP growing at about 6% y/y in H2, bringing growth to between 2% and 2.5% in 2020, followed by over 8% growth next year. Today's GDP data, stronger than what we expected, implies an upside risk to this outlook, although this is tempered by the possibility of tighter macro policy."

SHUANG DING, CHIEF ECONOMIST FOR GREATER CHINA AND NORTH ASIA, STANDARD CHARTERED, HONG KONG

"In general, the growth recovery is on track and seems to be accelerating in terms of year-on-year growth, beating market expectations.

"What matters now is how policy would respond… The market could start to think about whether the government would start to exit policy earlier than expected.

"Fiscal policy will still be supportive but the room for more easing is limited. In monetary policy, the easing cycle is nearing the end. We think there will be perhaps one RRR cut and one MLF rate cut (in Q3), and that's it, there could be no further cuts in Q4."

WOEI CHEN HO, ECONOMIST, UOB, SINGAPORE

"We were looking for 3.5%, but the figure is better than market expectations.

"The second quarter was mainly led by domestic easing of restrictions and the resumption of consumption and production in China. In the third quarter, we'll see more support from global demand, so China's growth should actually improve further in the third and fourth quarter and for this year, we still think that 1.8% growth is possible.

"But retail sales were a bit of a disappointment. I think domestically there needs to be further policy to boost consumption because retail sales were a bit weak."

YOSHIMASA MARUYAMA, CHIEF MARKET ECONOMIST, SMBC NIKKO SECURITIES, TOKYO

"The growth rate came out stronger than expected, with the help of supply-side factors such as output and a delayed pickup in private consumption of items such as cars. I expect growth to accelerate in the third quarter as consumption will likely continue a recovery and investment will serve as growth engine.

"Domestic demand will drive China's recovery ahead, but external demand could be a risk to the growth outlook given the possibility of large second round of coronavirus infections overseas.

"The solid second-quarter growth will pave the way for China to achieve a 1-2% annual growth this year as there's still room left for Beijing to deploy further monetary and fiscal stimulus."

BACKGROUND:

* The novel coronavirus first emerged in China last December. Tough lockdown measures to contain it brought economic activity to a near halt early this year, resulting in a 6.8% decline in GDP in the first quarter - the first contraction since at least 1992 when official quarterly GDP records started.

* New virus cases have been hovering near zero, but a sudden surge in infections in Beijing recently and so-called "imported cases" highlight lingering risks which could impede the economic recovery if fresh lockdown measures are required.

* China's services sector, which is dominated by smaller, private companies, has not rebounded as quickly as industrial production, though there are some signs that consumer confidence is gradually improving.

* Global trade has collapsed as governments imposed lockdown measures, weighing on China's export machine. But June exports and imports both returned to growth, suggesting demand is stabilising as more countries begin to relax anti-virus measures.

* China's government has rolled out a raft of support measures, including more fiscal spending, tax relief and cuts in lending rates and banks' reserve requirements to revive the economy and support employment.

* The central government also has allowed local governments to sell far more bonds to fund infrastructure projects. But policymakers are concerned about the risks of rising debt and speculative activity if they ease policy too aggressively.

* Still, analysts say China's recovery remains fragile as coronavirus infections continue to rise globally while heavy domestic job losses and lingering health concerns have kept consumers cautious.

* The International Monetary Fund has forecast an expansion of 1.0% for China for the full year, the only major economy it expects to report growth in 2020.

(Reporting by Asian bureaus; Compiled by Subhranshu Sahu)