Lombard: China not stimulating

TS Lombard with the note:

Sub-consensus H1/21 growth has led us to downgrade our full year forecast to 8.8% yoy from9.3% yoy. But don’t be misled: this isn’t the start of a China crash, just a mark-to-market. GDP growth in Q2/21 came in at 7.9% yoy, and showed unexpected improvements in domestic demand as retail sales rose 0.7% MoM. Our proprietary TSL estimate of GDP put growth at11.46% yoy, down from 20.8% yoy in Q1/21. Headline numbers and the sectoral breakdown show a gradual decline in activity and continued supply side-led growth. China will not drive the global economy, but nor is it likely to become a major dragon activity. We maintain our view of neutral monetary policy and targeted fiscal easing only in H2/21, broader easing is not necessary to boost growth. We also keep our forecast for a return to pre-Covid trend growth of 5.5% yoy inQ4/21. For markets, stabilizing data and a neutral, not easy monetary policy suggest the recent bond market rally is overdone.

Consumption surprised to the upside in June. Since February, we have been cautious on household spending.We continue to expect a weak service-sector recovery to weigh on wage growth, consumer confidence and, ultimately, spending. Delta variant outbreaks add to the downside risk to retail sales. China’s vaccine policy favours the working age population over the elderly, which leaves a portion of the country’s spenders on the side-lines.

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