China's Economy Is Expected to Shift to a Self-Sustaining Recovery Driven...
Title: China's Economy Is Expected to Shift to a Self-Sustaining Recovery Driven by Domestic Demand
In the first half of this year，China's economy was facing a number of problems，such as the repeated local outbreaks of COVID-19 in China and other countries，the not-yet-stabilized domestic economic recovery，the increased pressure of imported inflation and the rising leverage ratio after the outbreak. In response to the above-mentioned problems，the macro-policies took effect promptly and achieved remarkable results. In the second quarter，China's GDP grew by 7.9% year-on-year，showing a sustained and stable recovery trend; the two-year average growth rate reached 5.5%，which was close to the potential economic growth rate. Exports and real estate were still the main pillars of China's economy in the first half of the year，while consumption and manufacturing investments recovered a bit slowly.
Looking into the second half of the year，the accelerated global vaccination may lead to a gradual restoration of overseas production，and China's economy，which is usually driven by overseas demand，is expected to shift to a self-sustaining recovery driven by domestic demand. At the same time，real estate investment，in the face of policy constraints，will likely fall from the high level，but with the orderly progress in epidemic prevention and control，the recovery of the domestic service industry is expected to accelerate; and with the reduction of industrial costs，such as the implementation of the reserve requirement ratio (RRR) cut，the investments in manufacturing enterprises will likely be supported. Granted，with the practice of the new monetary theory in developed countries，the global inflation rate may rise significantly，continuous attention should still be paid to the risk of imported inflation. Against the backdrop of a rising base number，China's GDP growth rate is expected to fall below 6% in the second half of the year，and its annual GDP growth rate will be around 8.5%.
China has prominent advantages in industrial chains，but the rising base number may lead to a marginal slowdown in the second half of the year
Since the outbreak of COVID-19 last year，exports and real estate investments have become the main drivers of economic growth. Before the outbreak，the exports were a bit sluggish due to the impact of Sino-US economic and trade frictions. However，the massive stimulus measures in developed economies drove the recovery of demands after the outbreak，and at the same time，China's production industry recovered earlier than the rest of the world，which made China's advantages in industrial chains more prominent. Therefore，exports became the main driving force supporting domestic economic growth. From April to June，the year-on-year growth of exports in dollar terms was as high as 32.2%，27.8% and 32.2%，exceeding market expectations，and what was more，the goods exported gradually changed from durable goods (including home supplies and commodities related to real estate) to non-durable consumer goods (including suitcases and shoes) and capital goods (including machinery and transportation equipment). According to the data released by the National Bureau of Statistics，in the first half of 2021，the contribution rate of net exports to GDP growth reached 19.1%，which was still in the historically high range.
However，considering that the main line of global recovery is shifting from tradable commodities to non-tradable services and the rollout of vaccines is driving the recovery of overseas production (especially in emerging markets) plus the base effect，China's export growth rate will fall in the second half of the year，and there will be more uncertainties in the future. As a forward-looking indicator，the PMI New Export Order Index was 48.3% and 48.1% in May and June，respectively，which has been below 50% for two consecutive months.
The employment market for migrant workers has steadily recovered，and the endogenous growth momentum of consumption has strengthened
Affected by the expected instability caused by COVID-19，the recovery of household consumption and manufacturing investment in the first half of the year was relatively lagging behind and unable to carry on the momentum of exports and real estate. In terms of consumption，due to the increased income disparity caused by the pandemic，the increase in household savings and the restriction of consumption scenarios，consumption was recovering quite slowly. Specifically，first，the sudden outbreak of COVID-19 intensified the income disparity between different groups，and low- and middle-income groups suffered greater impacts. According to data from the National Bureau of Statistics，from January to June，the gap continued to widen between the year-to-date year-on-year growth rate (7.4%) of the per capita disposable income of Chinese residents and the year-to-date year-on-year growth rate (5.9%) of the median one. Second，having concerns about employment and income，residents tended to save more and consume less. According to the survey of the People's Bank of China，residents' willingness to save remained at a high level of 49.4% while their willingness to consume was only 25.1% in the second quarter. Third，the repeated outbreaks of COVID-19 in local areas and the limited consumption scenarios for residents made the recovery of service consumption a bit sluggish. From January to June，the total retail sales of consumer goods increased by 4.4% year-on-year on average for the past two years，of which commodity consumption increased by 4.9%，while the growth rate of food service income，which represents service consumption，dropped to -0.1%.
Looking into the second half of the year，with the steady repair of the economy，the increased support for low-income groups and the gradual comeback of service consumption，household consumption will continue to recover. In particular，the improvement in the employment of migrant workers will drive the consumption of low-income groups to pick up. For example，the number of migrant workers in the second quarter reached 180 million，which was very close to the level before the pandemic，and the average monthly income growth rate rose to 4.7% for the past two years. Also in the second quarter，the retail sales of consumer goods in rural areas increased by 14.3% year-on-year and 4.8% on average for the past two years，which was 1.6% higher than that in the first quarter，1.3% greater than that in urban areas.
Real estate investments fell from the high level，and manufacturing enterprises was gaining confidence steadily
Real estate is another important engine driving this economic recovery. In the first half of the year，real estate investments were quite resilient，with an average growth rate of 8.3% for the past two years. However，since the second half of last year，the "Three Red Lines" aimed at real estate financing and other regulatory policies have been successively issued，imposing great pressure on the financing of real estate companies and forcing them to reduce the increase (land acquisition and new construction) and digest the stock (construction completion). In the first half of the year，the year-to-date land purchase area and new construction area only increased by -6.5% and -2.0% year-on-year (the year-on-year data related to real estate investments in 2021 are all two year averages)，while the floor area completed increased by 6.1% year-on-year (the year-on-year growth rate for June was close to 25%).
However，according to the latest data，the year-on-year growth rates of the sales area of commercial residential buildings and the capital source for real estate enterprises in June fell to 4.8% and 8.5% respectively，and that of real estate investments also fell to 7.2% in the same month (the lowest level since last May). Once the real estate sales boom starts to cool down，the impact of the new financing regulations on investment will become more prominent. Coupled with the decline of new construction and other leading indicators and the weakening of pulling effect of land purchase costs，it is expected that real estate investments will experience pressure and fall in the second half of the year.
In terms of manufacturing investments，the recovery of investments by domestic manufacturing enterprises was not as fast as expected in the first half of the year，which seems to be contradictory to the high increase in corporate profits，high capacity utilization，and enhanced policy suppo