(Bloomberg) -- China’s economic recovery lost some upward momentum in July, with the effect of stronger market sentiment damped by muted demand in the real economy.
The overall indicator for the economy in July was unchanged from last month, after improving in May and June. The calculation of the indicators has been revised from this month to include metrics for car purchases, real-estate sales and the building sector.
The world’s second-largest economy returned to growth in the second quarter on the back of industrial output and investment, while consumers have been less willing to return spending to their pre-pandemic levels. Renewed virus outbreaks and Yangtze River flooding have had little direct economic effect so far, but may be keeping optimism in check.
Smaller firms grew more confident in July, with the overall index in Standard Chartered (OTC:SCBFF) Plc’s survey rising to the strongest since January, before the coronavirus pandemic caused the lockdown of Wuhan and the rest of the country.
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“A worry now is that recovery momentum on the supply side may be dragged down if demand fails to pick up,” Bloomberg Economist David Qu wrote in a report this week. “Recent U.S.-China tensions also risk creating economic drags that could further damp recovery in the longer term.”
Purchasing manager indexes are expected to show July being about the same as June, when the first official data for the month are released on Friday.
Exports orders for smaller firms resumed expansion, according to Standard Chartered, boding well for many companies which had been hit hard first by the trade war, and then by the pandemic. China’s exports have belied the general weakness seen in other Asian countries and across the world, unexpectedly rising slightly in June.
However, the outlook for global trade is not strong, with Korean exports in the first 20 days of July falling by more than in June.
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Car sales, which are a big chunk of consumer spending, improved from June but were still flat so far this month. Factory deflation will continue to hit profits, even if prices declined less than in May or June.
The government has prioritized infrastructure investment as one of the main drivers of economic recovery, with local governments increasing borrowing to pay for various projects. Stockpiles of steel reinforcing used in construction have reacted and fallen from the mid-March peak, but are still higher than a year ago, while property sales in China’s four top-tier cities were lower so far in July compared to the same period a year ago.
After the biggest rally in years, Chinese stocks have been hit by panic selling in recent days, with traders, company insiders and overseas investors all fleeing the country’s stock market as rapidly worsening relations with the U.S. hits sentiment. However, the main stock index is still up almost 10% from the end of June.
Note on Early Indicator construction
From this month, Bloomberg has changed some of the components for this early look at the the economy, adding home sales in the biggest four cities, weekly car sales, and inventories of steel reinforcing, while removing iron-ore prices, sales manager sentiment, and property-related stocks.
Bloomberg Economics generates the overall activity reading by aggregating the three-month weighted average of the monthly changes of eight indicators, which are based on business surveys or market prices.
- Major onshore stocks - CSI 300 index of A-share stocks listed in Shanghai or Shenzhen.
- Total floor area of home sales in China’s four Tier-1 cities (Beijing, Shanghai, Guangzhou and Shenzhen).
- Inventory of steel rebar, used for reinforcing in construction (in 10,000 metric tones). Falling inventory is a sign of rising demand.
- Copper prices - Spot price for refined copper in Shanghai market (yuan/metric tonne).
- South Korean exports - South Korean exports in the first 20 days of each month (year-on-year change).
- Factory inflation tracker - Bloomberg Economics created tracker for Chinese producer prices (year-on-year change).
- Small and medium-sized business confidence - survey of companies conducted by Standard Chartered Plc.
- Passenger car sales - monthly result calculated from the weekly average sales data released by the China Passenger Car Association.
©2020 Bloomberg L.P.