July 15, 2020 / 11:16 PM / 22 days ago

China's economy seen returning to growth in second-quarter, more support needed to bolster recovery

BEIJING (Reuters) - China’s economy is likely to return to modest growth in the second quarter after a record contraction, as lockdown measures ended and policymakers stepped up stimulus to combat the shock from the coronavirus crisis.

A workers wearing face masks, following the outbreak of the coronavirus disease (COVID-19), works at a construction site in Beijing, China July 16, 2020. REUTERS/Carlos Garcia Rawlins

The gross domestic product (GDP) numbers, due early Thursday, will be closely watched around the world, especially as many countries continue to grapple with the COVID-19 pandemic even as China has largely managed to contain the outbreak and has begun to restart its economic engines.

Analysts polled by Reuters forecast GDP to have grown 2.5% in April-June from a year earlier, reversing a 6.8% decline in the first quarter - the first contraction since at least 1992 when official quarterly GDP records started.

However, the expected growth rate would still be the weakest expansion on record.

Rising cronavirus infections in some countries, including the United States, have overshadowed improved demand for Chinese exports while heavy domestic job losses and lingering health concerns have kept consumers cautious.

China’s services sector, which is dominated by smaller firms, has not rebounded as quickly as factory production, though there are some signs that consumer confidence is gradually improving.

On a quarterly basis, GDP is expected to have grown 9.6% in April-June, compared with a decline of 9.8% in the first quarter.

Data on Tuesday showed the country’s imports in June rose for the first time this year as stimulus boosted demand for building materials, while exports also edged up as overseas economies reopened after lockdowns.

While China’s economy is showing a steady recovery, a hard battle still lies ahead as the situation remains severe both at home and abroad, state radio quoted Premier Li Keqiang as saying on Monday.

Along with second-quarter GDP data on Thursday (0200 GMT), China will also release June factory output, retail sales and fixed-asset investment.

DEBT RISKS

Central bank governor Yi Gang has said China would keep financial system liquidity ample in the second half but would need to consider withdrawing support at some point, raising questions among investors over when it may start dialing down stimulus.

A spike in debt risks remain a worry for policymakers, analysts say.

Ruan Jianhong, head of the central bank’s statistics department, told a briefing last week that China’s macro leverage ratio jumped 14.5 percentage points in the first quarter and climbed further in the second quarter.

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Still, analysts expect policymakers to maintain support for the economy for a while longer to ensure the recovery remains on track, particularly given the fragile global economic conditions.

Credit growth is also expected to remain strong. New bank lending hit a record 12.09 trillion yuan ($1.72 trillion) in the first half of the year.

The International Monetary Fund has forecast China’s GDP to expand 1.0% for the full year, the only major economy expected to report growth in 2020.

Reporting by Kevin Yao; Editing by Shri Navaratnam

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