Delta variant and floods spark anxiety over Chinese growth

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China’s economy sharply underperformed in July, with widespread flooding and an outbreak of the coronavirus Delta variant exacerbating concerns that the country’s growth trajectory would continue to lose momentum.

Official data released on Monday showed that retail sales rose 8.5 per cent compared with the same month a year earlier, helped by base effects from 2020, while industrial production climbed 6.4 per cent. Economists polled by Bloomberg had anticipated growth of 10.9 per cent and 7.9 per cent respectively.

China has instigated strict travel restrictions in response to its biggest outbreak of the coronavirus this year, which began in mid-July in the city of Nanjing and has since led to hundreds of new infections across multiple cities. Extreme flooding centred around Henan province has also curtailed activity over the past month.

Those disruptions have coincided with signs of deeper structural shifts in the Chinese economy, with the industrial boom that fuelled the country’s rapid recovery from the early stages of the pandemic coming under pressure as credit conditions tighten and consumers remain cautious.

Julian Evans-Pritchard, senior China economist at Capital Economics, noted that while retail sales fell on a month-on-month basis, investment spending and industrial activity, which he said were less sensitive to the coronavirus restrictions, were also weaker.

“The drop back in consumption should reverse once the virus situation is brought under control and restrictions are lifted,” he said. “But we think the slowdown elsewhere will deepen over the rest of the year.”

In July China’s export growth, which has been a big engine of its recovery over the past year, slowed to 19 per cent year on year, compared with 32 per cent in June. In a move designed to ease monetary conditions, the government cut the reserve ratio requirement for banks.

“We think the data will increase the chances of more RRR cuts in the weeks ahead,” said Mitul Kotecha at TD Securities. He added that the July data was weaker than forecast even when taking into account fading base effects from last year.

The port of Ningbo-Zhoushan, one of the largest in China, was partially shut down last week, highlighting the vulnerability of international trade to new infections in the country.

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ANZ Bank on Monday lowered its forecast for 2021 growth to 8.3 per cent, from 8.8 per cent following the July data. Louis Kuijs, head of Asia economics at Oxford Economics, said the setback was “large enough to warrant a downward revision of our growth forecast” for the second half. 

“Given China’s ‘zero tolerance’ approach to Covid, future outbreaks will continue to pose significant risk to the outlook,” he added.

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