Chinese economy regains momentum with major downside risks on the watch

AXA IM’s Senior Emerging Asia Economist, Aidan Yao, shares his latest macro views on China and Asian Market every month.

In this month’s video he talks about the recovery momentum of Chinese economy and the major downside risks it’s facing.

Please find the full script below:

Hello, welcome to our monthly video series. My name is Aidan Yao. I’m the senior emerging Asia economist here at AXA Investment Managers.

As the first economy who emerged from the ravages of COVID-19, the Chinese economy has continued to regain growth momentum.

The economic data for May suggested that the recovery has accelerated in most parts of the Chinese economy.

Industrial production, after exhibiting a V-shaped rebound in March and April, saw further growth normalization in May.

Investment growth also turned positive, thanks to government stimulus lifting infrastructure investment, while easier monetary conditions helped to support housing construction.

Even the services sector managed to claw back some of the previous losses, gaining 1% for the month of May.

Overall, things appear to be looking up. We expect the Chinese economy would resume growth in the second quarter this year, slightly faster than our previous expectations.

That however, does not mean that we should disregard the downside risks in the economy for the remaining of this year:

First, we think external demand is likely to remain sluggish for quite some time to come. Even though the most of the developed world economies are exiting lockdowns, it will likely take a few months before we know what kind of “normal” these economies are heading to.

Domestically, weak labor market is likely to hinder income growth, while renewed COVID cases in Beijing are raising the possibility of a second wave of infections. Both of these two are likely to slow the income and the consumption recovery going forward.

All these mean that policy support needs to continue. Beijing has recently rolled out a stimulus package worth more than 5% of GDP at this year’s National People’s Congress. And we think, executing that plan is now a priority.

In that regard, a combination of monetary and fiscal stimulus worth 5-6% of GDP should be sufficient in our view to safeguard the current the economic recovery, allowing the Chinese economy to reach more than 2% of growth for the full year of 2020.

Thank you and stay safe.