Caixin Insight: GDP Growth Beats Expectations
Second-quarter data better than anticipated
China’s economy grew 3.2% year-on-year in the second quarter, returning to growth after a record 6.8% contraction in the first quarter, official data (link in Chinese) showed Thursday, slightly beating the median estimate of 2.9% in a Caixin survey (link in Chinese) of economists. The GDP growth for the first half was still in negative territory, standing at -1.9%.
The recovery varied by industry, with the construction and manufacturing improving most in the second quarter, growing 4.4% in Q2 after shrinking 8.4% in Q1. Agriculture also returned to growth, gaining 0.9% in the first half. While services performed relatively well in the first quarter in comparison to other industries, it did not do as well in the second, growing just 1.9% in Q2 with added value falling 3.6 percentage points from the previous quarter.
Notably, official data reported that 5.64 million new urban jobs have been created in the first half of the year, that is 62.7% of the 2020 annual goal. Given the importance of employment this year, we will probably see more jobs created in the next half of the year, and the annual goal over-delivered.
Imports and exports return to growth in June
China’s exports grew 0.5% year-on-year in June, up from a 3.3% drop in May. Meanwhile, imports rose 2.7% year-on-year, up from a 16.7% slump in the previous month and marking the first increase this year.
The readings beat market expectations of a 3% decline in exports and a 10% drop in imports according to Caixin surveys. The high performance might in part be due to the rising external demand for medical supplies and the country’s economic recovery from the Covid-19 pandemic.
How solid is the foundation under the A-share bull market?
As you almost certainly know by now, Chinese A-shares have entered a bull run. But there’s much disagreement among respected analysts about how solid the underlying foundation is, and whether or not Covid-19 has created a market situation that can be understood with traditional fundamental analysis.
One futures firm research report recently proclaimed “there is no doubt that this is a once-in-a-decade bull market, so don’t miss it or you’ll have to wait another 10 years.” Trading volume in Shanghai and Shenzhen is at its highest since the 2015 China stock market crash, and stock index futures have seen unprecedented price rises.
But the 2015 crash is still fresh in our memories, and some see a coming fall. Shanghai Securities argues the foundation for the bull market is solid, with three basic factors driving it:
1. Easy money driving investment
2. Expected recovery in earnings as Covid-19 eases
3. Realization of dividends from capital market reforms
The opposing camp, however, argues that current market exuberance is irrational, as Covid-19 is far from over, most companies cannot quickly restore growth, and the market could withdraw in the second half of the year given external factors like poor Sino-U.S. relations, geopolitical conflicts, the epidemic situation, among others. Citic Securities’ chief strategist Qin Peijing, for example, argues that this is a temporary rebalancing, repairing low-valuation sectors that will “continue for another week or two,” but not a real style switch.
There’s a lot more on this than we have room for here, so we highly recommend reading Caixin’s Chinese-language coverage here for further discussion of leveraged trading (one brokerage reported account registrations quadrupled in one day last week), the revenue swap business, major new public fund offerings, “new third board” performance and more.
SMIC shares triple on debut in biggest mainland IPO in a decade
SMIC made its much-anticipated trading debut on Shanghai’s Nasdaq-style STAR Market this morning, marking the biggest new listing in a decade with shares opening at 95 yuan ($13.59), representing a 246% gain from their listing price of 27.46 yuan.
The IPO is the latest step in a remarkable turnaround for the company fueled by Sino-U.S. tensions, which pushed it out of relative obscurity to the forefront of U.S.-China tech competition with its Hong Kong-listed shares nearly quadrupling in value since November on hopes it will receive strong government support in China’s self-sufficiency drive.
For more on SMIC’s rise and its role in U.S.-China rivalry, read Caixin Global’s story “In Depth: China’s Chip Dreams Power SMIC’s Mega IPO.”
CBIRC warns of coming wave in NPLs
The China Banking and Insurance Regulatory Commission (CBIRC) said on Saturday that banking institutions should be prepared for a “major rebound” in nonperforming loans (NPLs) because the impact of Covid-19 has yet to be fully exposed.
CBIRC suggested that some investment-grade bonds have yet to be rated as nonperforming because financial regulators have told banks to roll over or extend loans for some businesses that were hit hard by the economic impact of Covid-19, and that default risks for such businesses will persist as long as their management problems remain unsolved.
To guard against the massive default risks, the CBIRC instructed banks to reduce dividends and stop raising bonuses. It added that it would support banks replenishing capital by issuing ordinary shares, preferred shares, perpetual bonds and other instruments, as well as help seek government funding for those who find it hard to raise capital on the market.
PBOC expands DCEP trials to Didi and Meituan
The ride-hailing giant Didi Chuxing and the food delivery giant Meituan Dianping are partnering with the central bank to explore application of digital currency on their respective platforms. Didi and Meituan joined a list of companies and banks to test the digital yuan being developed by the People’s Bank of China (PBOC) in real-life scenarios. The central bank’s research wing is also in discussions about trials with Bilibili Inc., a major video streaming company.
The details of the testing are still unclear, but many speculate that integration of the central bank’s Digital Currency Electronic Payment (DCEP) with these major platforms would help the central bank carve out a share of the country’s $27 trillion payments industry.
One of the main questions to be answered about the cooperation is exactly how DCEP will be used. Currently, their applications accept payments through online payment providers like Alipay and WeChat Pay, or through bank cards directly. DCEP, according to some peek shots found online, lives on a mobile wallet application. It is possible that the mobile wallet application will become just another payment option on these platforms, but that means direct competition between DCEP and existing payment providers and even commercial banks. To boost adoption of DCEP, more innovative applications of the digital currency will be necessary.
What to watch for
- July 17: individual industry data for second quarter
- July 20: Movie theaters to reopen at limited capacity, a sign of hope for the film industry that has seen its revenue plummet more than 70%
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