China Economic Update 2020 Q2
China’s Gross domestic product (GDP) grew 3.2% year-on-year in Q2 2020, recovering from a record contraction in Q1 as lockdown measures ended and policymakers stepped up stimulus measures to combat the impact of the pandemic crisis. So far, the targeted stimulus measures from Beijing seemed to have mitigated the worst effects of private-sector bankruptcies and related unemployment.
The Caixin China General Manufacturing PMI index, an important indicator of the strength of the Chinese economy, grew to 51.2 in June 2020 from 50.7 the previous month, signalling a second month to month improvement in the health of the sector. Though modest, the rate of improvement was the strongest since December 2019. The upturn was supported by the continual easing of lockdown measures related to the COVID-19 outbreak, which enabled more firms to resume business operations and a general improvement in market conditions[i]. The services sector still struggled in Q2, with the most restaurants reporting a contraction in revenues with fewer clients coming in through April and May.
Regarding to currency exchange rates, CAD/CNY showed an upward trend for CNY in Q2 2020, compared to Q1 2020. The exchange rate reached the high 5.287 RMB briefly on June 9 and returned to the level above 5.15 afterwards.
2020 Economic Outlook
The Economist Intelligence Unit (EIU) under the Economist Group expected real GDP to expand by 1.4% on average in 2020, following a contraction in the first quarter stemming from the pandemic shock. Projects for year-end economic growth will be far below the actual growth of 6.1% in 2019. While the National People’s Congress at the Two Sessions (Lianghui) is normally when the revised GDP target is announced, the outcome this year was that no definitive GDP growth target will be set for 2020. The focus would instead be placed on recovery and unemployment levels.
Overall, results show a mild recovery built from the second quarter as industries resumed normal operations, but the international spread of the pandemic will hit trade performance. Many companies have returned to work to find that their international clients are being impacted by the lockdown policies of other countries.
China’s stimulus package is similar in size to its response to the 2008 economic crisis, which came in at about RMB 4 trillion (CAD $765 billion). However, China’s economy is significantly larger than it was in 2008, meaning that this stimulus package represents a smaller percentage of current GDP. The US, in contrast, has already injected over USD $3 trillion (CAD $4.03 trillion) into its economy. One factor is that the lower level of stimulus in China is consistent with the smaller impact of COVID-19 with about 84,000 confirmed cases in China and 4.67 million cases in the US as of July 28th. The government measures for China’s stimulus included more fiscal spending, tax relief and cuts in lending rates and banks’ reserve requirements. Central bank governor Yi Gang has said China would keep financial system liquidity ample in the second half but would need to consider withdrawing support at some point. The central government is focused on taking a more cautious approach to avoid some of the problems experienced with stimulus spending in 2008 tied to debt levels and real estate speculation.
Growth prospects in the second half of 2020 will depend on the success of domestic stimulus efforts and how other countries control the health crisis within their own borders. According to the customs statistics, in the first six months of 2020, China’s total cargo trade value was 14.2 trillion Yuan, down 3.2% YoY, in which the export value decreased by 3.0% and the import value 3.3%. In Q2 of 2020, China’s total cargo trade value grew by 93.1% from Q1, in which the export value grew by 111.4% and the import value by 73.0%, indicating that China’s import and export trade has been gradually recovering. Chinese furniture exports totalled RMB 68.7 billion (CAD $13.14 billion) in the first quarter of 2020, a decline of 18.7% from the same period last year. Due to the importance of the US and the European Union as key markets for Chinese exports, the situation in those regions will be particularly significant. There is likely to be an ongoing impact of order cancellations from offshore importers until they fully recover from COVID-19.
Weak economic growth and rising unemployment levels will present a severe challenge to China’s policymakers. According to the EIU, the crisis will force unplanned policy changes, including looser monetary and fiscal policy settings in order to offset the economic impact of the pandemic. These measures are being adjusted as economic activity normalizes and companies resume operations, but a cautious outlook is maintained as global markets struggle to recover from COVID-19, and growing tensions between China the US complicate international relations.
The Construction Sector
The National Bureau of Statistics of China (NBS) reports that the average new home prices in China’s 70 major cities increased by 4.9 percent year-on-year in June 2020, the same pace as in the previous month and at the softest rate since May 2018, as the COVID-19 outbreak scared potential buyers from making as many site visits for potential transactions. In the first six months of 2020, 694.04 million m2 of commodity houses were sold, down 8.4%. The commodity house sales totalled 6,689.5 billion RMB, down 5.4%. Total investment in real estate in China had a year-on-year increase of 1.9 percent from January to June, rebounding from 0.3 percent year-on-year drop of investment from January to May.[ii] Compared to Q1, real estate investments increased by 85.8% in Q2, the total area of commodity houses sold in Q2 grew by 116%, and commodity house sales grew by 129%. China’s real estate industry was generally slack in Q1 and boomed during Q2 due to seasonal characteristics of the industry combined with recovery measures.
Total construction starts are up in Q2 2020 by 76.1% year-on-year, showing a strong recovery from the 23.9% year-on-year drop for construction starts in Q1 2020.
Total floor area completed in China in Q2 2020 was at 1245 million m2, down 12.5% compared to the 1423 million m2 completed in Q1 2019.[iii]
China Wood Imports
China’s softwood log imports from Canada in 2020 (YTD) was 315,000 m3, a significant drop of 65.1 percent compared to 2019 (YTD), 902,000 m3. New Zealand occupied the largest market share for softwood log imports in China. Comparing to last year, the volume of softwood log imports from New Zealand decreased 29 percent, dropping from 7,375,000 m3 to 5,234,000 m3. The softwood log imports from Russia and the USA were also down 37.1% and 60.5% respectively.
China softwood lumber imports from Canada in 2020 (YTD) was 1,212,000 m3, a sharp decline of 46.4 percent compared to 2019 (YTD), 2,260,000 m3. The softwood lumber imports from China’s largest importer Russia had a fall of 13.9% from 7,043,000 m3 to 6,063,000 m3. The softwood lumber imports from Finland and the USA decreased by 17.9% and 15.1% respectively.
According to the China Bulletin, Softwood log stocks at China’s main ocean ports totalled 4.44 million m3 at the end of June 2020, a slight decline of 2.3 percent from the previous month. Radiata pine log inventories recorded an increase of 3.3 percent. European spruce log inventories totalled 653,000 m3, a significant decline of 33.7 percent.