Nonetheless, a reversal from the current accommodative stance is unlikely as China’s output gap remains negative. With the recent rally in equity markets and an increase in property transactions, authorities will likely become more concerned about rising financial risks.
ANZ’s China GDP projection is normally based on two models - one based on monthly PMI data and the other constructed from various readings of different industries.
However, the severe disturbance of the COVID-19 outbreak took monthly PMIs to historic lows in February and the first quarter, reducing the reliability of the first model.
Hence, ANZ Research has relied on the industry-based model to estimate China’s second quarter GDP growth.
China’s primary industry likely grew 1.2 per cent in the quarter after contracting 3.2 per cent in the first quarter. Compared with the significant slumps in secondary and tertiary industries, primary industry is the least affected by the global pandemic, as flagged by one report published by the Chinese Academy of Agricultural Sciences in June.
Food prices have come off their peaks to around 12 per cent, year on year, in the second quarter, from 20 per cent in the first quarter. This could suggest relatively more stable supply and demand conditions in the second quarter.
In addition, fixed-asset investment in primary industry has reversed its downtrend since the beginning of the second quarter, rising 6.9 per cent year on year on average in April and May, compared with a fall of 15.9 per cent in the first quarter.
ANZ Research estimates this industry’s GDP by using daily value added based on nominal GDP and working days in the second quarter, and then converting it into real terms by using agricultural prices. Based on our calculations, China’s primary industry GDP may have increased 1.2 per cent.
Having said that, the GDP share of primary industry has declined significantly to 7 per cent in 2019, from more than 10 per cent 10 years ago. Its growth has been stabilising at around 3 per cent to 5 per cent during this period, with a very limited contribution to overall GDP growth, ranging from 0.2 percentage points to 0.4 percentage points.
ANZ Research has been tracking China’s manufacturing and construction activity using high-frequency data.
China’s heavy industry began to resume production in late March. One of the largest steel-makers in China has confirmed their plants kept producing even when located in a completely locked-down city. In the second quarter the situation significantly improved.
Construction activity also recovered. In the first five months of 2020 the decline in property investment narrowed to 0.3 per cent, compared with 3.3 per cent over the first four months. The figure in June may have returned to positive.
Statistically, China’s industrial value-added is a good predictor of GDP of the secondary industry. Based on our current forecast for June, together with the actual data in April and May, GDP of secondary industry is forecast to have expanded 3.5 per cent year on year in the second quarter after contracting in the first.