Term Report

China this week reported the official GDP growth number for Q2, which was a surprisingly low 4.3%, although the aggregated first half number of 4.7% is still within the target range for the year mandated at the beginning of the year, which is between 4.5 to 5%. This seems like a good opportunity to sum up the state of play with China’s economy, and our view is that it is basically bifurcating. On one side, is the high-profile stuff, the batteries, the robots, the AI, the EV car exports, it’s going well. Exports year on year are up 20% and China is racking up trade surplus records regularly. But the real economy that impacts on most of China’s 1.4 billion people is really not in good shape. It’s not so easy to define the state of the economy because transparency is sort of fading ever further. But the heart of China’s economy for the last 30 or 40 years has been the property market, and that market slumped five years ago and even today there is no sign of any substantial recovery. Real estate development investment for the first half compared to last year is down 18%, and new homes prices in June were reported down again, this time 3% from the same time last year. Land sales also continued to decline which has huge implications for local government finances.

The trade surplus in H1 was up a staggering 37% on the previous year. Which sounds great, but it’s actually a negative in many ways in terms of the economies of other countries. The global economy needs to be in good shape for China’s export bonanza to continue.

Consumer spending is crucial, and the State Council just announced new policies trying to boost it. Clearly this is not easy to achieve. Total retail sales of goods & services was up just 3%.

The exchange rate of the RMB is a big issue, and it was up around 3% over the H1 period. The Shanghai stocks market has also done okay, riding on AI stocks and Wall Street exuberance.

The second half of the year is going to be challenging. The domestic problems are proving intractable, and the geopolitical backdrop is getting more complex all the time. Mr. Trump’s address to the American people late this week raises the stakes in terms of the complexity and sensitivity of China-US relations and no matter how it plays out that is going to be messy. 

Have a great weekend anyway.