China 2020 Economic Report - H1

Executive Summary

• Due to the COVID-19, China’s GDP growth in the first quarter was -6.8% in Q1, suffering its first contraction in 28 years. GDP growth however bounced to +3.2% in Q2, hinting to a V-shaped recovery, led by industrial outputs.
• Consumer confidence has hit an historic low, with retail sales of consumer goods contracting by -19% year-on-year in Q1 and -3.9% in Q2. Household consumption fell -12.5% in Q1 and -5.7% in Q2.
  
• After a -10.8% drop in Q1, inward foreign direct investment started to improve in April (+8.6% year-on-year) and investment reached USD 77 Bn end of July, with a +0.5% year-on-year growth over the 7 months. Outward investment decreased overall -4.4% in the first semester, but increased strongly (+53.1%) in ASEAN countries.
  
• China’s foreign trade was hit hard by the pandemic in Q1, with exports slowing by -9.3%, while imports contracting by -7%. Yet, at the end of Q2, exports increased +0.3% due to strong demand in medical equipment and textiles (including masks) and electronics.
  
• Swiss exports to China decelerated by -12.2% year-on-year by the end of March and worsen to -24.4% year-on-year at the end of July. Exports of precious metals strongly decreased in the first seven months of 2020 (-76.7%) and precision instruments (-11.5%) as well as machinery were strongly affected (-10.1%). At the contrary, exports of medicaments and chemicals grew +20.9% year-on-year.
  
• Imports from China to Switzerland grew by +9.9% in the same period, driven by textiles (+67.8% year-on-year).
  
• Unemployment peaked during the lock-down: the official urban unemployment rate reached 6.2% in February and remained at 5.7% in June. However, the migrant-worker population was disproportionately affected, with estimates of 80 million unemployed persons in February and 5 million in June.
  
• To face the crisis, the Government allowed the deficit-to-GDP ratio to be raised to more than 3.6% (up from 2.8% 2019) and allowed the emission of RMB 1 trillion in special bonds for COVID-19. However, it refrained from enacting a large-scale stimulus package as it did after the 2008 global financial crisis to boost economic recovery. All in all, the stimulus has been worth about 5% of GDP.
  
• The fiscal and monetary policies have been targeted and cautious, in order to avoid elevating already high debt levels and consequently destabilizing the economy. After lowering the reserve requirement ratio (RRR) for commercial banks, two policy rate cuts and a decline in interbank rates, PBoC stopped monetary loosening in May and started absorbing liquidity from the interbank market, thus moving interbank benchmark rates up again. Targeted support will be the focus of H2.
  
• China positioned the construction of “new infrastructure” as a policy pillar of its economic recovery. This new infrastructure will focus on 5G, IoT, big data centres, IA centers, smart transportation and smart energy. According to estimates, total future investment could surpass RMB 23 trillion by 2025.