China’s economy rebounds amid steep slump, US trade tensions

China’s economy returned to growth in the second quarter amid a deep slump at the start of the year, but domestic consumption and investment remained weak as the shock from the coronavirus crisis underscored the need for more policy support to bolster the recovery.

Asian share markets fell, partly reflecting the broad challenges facing the world’s second-largest economy as it tries to regain its footing and deal with heightened tensions with the United States on trade, technology and geopolitics.

Gross domestic product (GDP) rose 3.2% in the second quarter from a year earlier, the National Bureau of Statistics (NBS) said on Thursday, faster than the 2.5% forecast by analysts in a Reuters poll, as lockdown measures ended and policymakers ramped up stimulus to combat the pandemic-led downturn.

The bounce was still the weakest expansion on record, and followed a steep 6.8% slump in the first quarter, the first such contraction since at least 1992 when quarterly gross domestic product records began.

“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,” said Rodrigo Catril, a foreign exchange strategist at NAB in Sydney.

“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 US as well.”

Indeed, the consumption downturn has been telling and suggest a bumpy global outlook, especially as many countries continue to grapple with the COVID-19 pandemic even as China has largely managed to contain the outbreak and has begun to restart its economic engines.

Retail sales were down 1.8% on-year in June - the fifth straight month of decline and much worse than a predicted 0.3% growth, after a 2.8% drop in May.

Wanda Film, China’s largest cinema chain operator which has more than 600 cinemas, said on Tuesday it expects to report a first half net loss of 1.5-1.6 billion yuan ($214-228 million), from a net profit of 524 million yuan in the year-ago period, after the coronavirus kept its cinemas shut for almost the entire period.

In the first half of the year, the economy contracted 1.6% from a year earlier, the data showed, underscoring the sweeping impact of the health crisis and highlighting the uneven nature the recovery in China where the virus first emerged late last year.

Rising coronavirus infections in some countries, including the United States, have overshadowed improved demand for Chinese exports while heavy domestic job losses and lingering health concerns have kept consumers cautious.

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

“We have confidence that the economy will continue to recover in the second half,” statistics bureau spokeswoman Liu Aihua told reporters.

Authorities are widely expected to maintain policy support in the second half to bolster the revival.

The government has rolled out a raft of measures, including more fiscal spending, tax relief and cuts in lending rates and banks’ reserve requirements to revive the coronavirus-ravaged economy and support employment.

But debt worries have kept a leash on China’s stimulus tap. Net fiscal stimulus unveiled so this year amounted to just over 4 trillion yuan ($571.76 billion), much restrained compared the spending burst in other major economies including the United States and Japan.

The Institute of International Finance estimates China’s total debt rose to 317% of gross domestic product in the first quarter of 2020, up from 300% in late 2019 and the largest quarterly increase on record.

The industrial economy offered some hope for the nation as it tries to regain its footing, with output in the vast sector rising 4.8% in June from a year earlier, the third straight month of growth, the data showed, quickening from a 4.4% rise in May.

Fixed asset investment fell a less-than-expected 3.1% in the first half of the year from the same period in 2019, moderating from a 6.3% decline in the first five months of the year.

Real estate investment growth quickened to 8.5% in June from 8.1% in May, while the annual drop in infrastructure investment also eased in the first half due to fiscal stimulus.

Reuters