China’s economic activity slows in Q2

China’s economic growth slowed below expectations in the second quarter, as higher prices of raw materials and new coronavirus outbreaks weighed on economic activity.

Economic growth slowed significantly from a record 18.3% expansion in the first quarter, with gross domestic product 7.9% expansion in the April-June period, falling below consensus for 8.1% rise.

Industrial production grew more slowly, dragged by a sharp fall in motor vehicle production, while cooling in China’s housing market, a key engine of growth, added to weaker performance of the world’s second biggest economy.

Despite weak Q2 data, economists remain cautiously optimistic, as the economy strongly rebounded from Covid-19 crisis and June retail sales and industrial output figures came above expectations, suggesting that the economy keeps fairly strong momentum.

More concerns for economists cause uneven recovery, as consumer spending was hurt again by new coronavirus outbreaks while the activity in the industrial sector was obstructed by supply shortages and higher raw material costs.

Investors continue to closely watch the activity of the People’s Bank of China after the central bank announced last week that it would cut the amount of cash that banks must hold as reserves, just after some major central banks signaled that they started thinking about gradual reduction of pandemic financial stimulus.

The China’s central bank has released about 1 trillion yuan in long-term liquidity to support the economy and attempts to start rolling back pandemic-era stimulus would be challenged by uneven economic recovery and many external instabilities and uncertain factors, as global epidemic continues to evolve.

Economists expect more support from the central bank this year, with further cut in the bank reserve requirement ratio towards the end of the year, seen likely, while a cut in China’s benchmark loan prime rate could be also on agenda of the central bank.