China’s economy performed well in Q2 though slower growth triggered policy responses

China’s strong economic rebound continued in the second quarter, as the impact of 2020’s Covid-19 shutdowns receded. GDP expanded by 7.9 percent in Q2, supported by resilient external demand and improving domestic demand. The effects on GDP growth data stemming from comparison with the same periods of last year are becoming less pronounced. In the coming quarters, further growth modera-tion can be expected, as base effects wear off and give a more realistic picture.

The recovery remains unbalanced, as consumption – although improved – is still not strong enough to balance out any slowdown in investment or exports. Renewed, small scale regional Covid-19 outbreaks are hampering full normalization in retail, and especially services such as transport and tourism. Despite China’s success in containing the pandemic, Covid-19 is still impacting the economy. Future outbreaks and regional lockdowns continue to pose a risk to China’s economic performance.

The aftermath of the pandemic is also intensifying persistent domestic structural problems. Regional disparities in the recovery indicated a growing disconnect between coastal regions and China’s poorer western and northeastern provinces. Furthermore, a skills mismatch is hindering labor market recovery as the manufacturing sector struggles to find workers to meet strong demand, whereas recent graduates’ aspirations lean towards the weaker services sector.  

External challenges came from soaring commodity prices for essential metals such as copper and iron ore; shortages in the supply chain, especially for semiconductors; skyrocketing shipping costs; and currency appreciation, which raises the price of Chinese exports. These issues did not derail external demand and seemed to have subsided by the end of the quarter. However, the impact of higher costs will lag and could affect exports in the coming months.

Overall, China’s economy weathered the challenges well. But the second quarter also marks the begin-ning of more challenging aspects as economic growth normalizes in the coming quarters. The govern-ment is not leaving things to chance. In anticipation of stronger economic headwinds supportive policies are already put in place. This also comes at a time of accelerated securitization of foreign economic rela-tions and a tightening regulatory grip on the country’s economy.

The MERICS China Confidence Index (MCCI) measures household and business confidence in future income and revenues. The index is weighted between household and business indicators. It includes the following indicators: stock market turnover, future income confidence, international air travel, new manufacturing orders, new business in the service sector, urban households’ house purchase plans, venture capital investments, private fixed asset investments and disposable income as a share of household consumption. All components have been tested for trends and seasonality. The MCCI was first developed in Q1 2017.