China Q2 GDP: The economic recovery is flashing some warning signs

In the first quarter of 2021, China posted record GDP growth of 18.3% compared to a year prior — although that was largely because the country experienced an historic contraction early last year because of Covid-related restrictions. Compared with the first quarter of 2019, GDP increased 10.3%.

After a slump in the first three months of 2020, China’s economy started to recover as it was boosted by state-led investments in massive infrastructure projects and surging overseas demand for medical supplies and electronics.

A huge backlog at China's ports could spoil your holiday shopping this year
But the Chinese economy has flashed some troubling signs in recent months. Record commodity prices drove factory inflation to the highest levels in more than a decade, while supply chain disruptions caused by shipping backlogs and an energy shortage held back factory production.
Growth in the services sector also slowed, as a Covid-19 outbreak in southern China and subsequent containment measures curbed consumer and business activity.

Concerns for weaker growth grew last week, after the People’s Bank of China reduced the amount of cash financial institutions must keep in reserve. The move to reduce the reserve requirement ratio by 50 basis points surprised observers, who felt it was a sign that the economic recovery may be faltering.

The first cut to that ratio since April 2020 was intended to encourage banks to lend more, as small business are facing difficulties because of the surging commodity prices, the central bank said.

Even so, China unveiled some good news on trade earlier this week. Exports surged more than 30% in June compared with the same period in 2019, according to customs data.

The strong exports data has helped ease market concerns over “an imminent growth slowdown,” according to Ting Lu, chief China economist for Nomura.

But Lu said the rebound may be “short-lived,” as it was partly driven by the release of pent-up demand to clear backlogs at some major South China ports.

Lu expects China’s GDP to grow 8.1% in the second quarter, before slowing to 6.4% and 5.3%, respectively, in the following two quarters. For the entirety of 2021, he projected the economy to expand 8.9%.

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