The recovery has shown signs of plateauing in recent months after a sharp V-shaped rebound driven by industrial output and exports. Consumers had remained cautious after incomes took a knock during the pandemic and sporadic virus outbreaks more recently restricted travel and spending. The June pickup in retail sales may fuel optimism that the recovery is becoming more balanced.

“The overall growth perspective is still pretty resilient in terms of industrial production and retail sales,” Helen Qiao, chief Greater China economist at Bank of America Securities, said on Bloomberg Television. “Retail sales could have been worse” since cellphones, cars and airlines were doing very poorly in previous months, she said. “This is a great surprise to see that in June, when online promotion was in place, people are still spending,” she said.

The second-quarter data suggest Beijing can comfortably meet its growth target of more than 6% for the year, and continue to drive global markets for commodities and industrial goods.

The central bank last week fueled worries about the growth outlook with a surprise move to cut the amount of cash banks must hold in reserve, raising speculation of a return to policy stimulus. The reduction in the reserve requirement ratio, which came into effect Thursday, frees up about 1 trillion yuan ($155 billion) in liquidity that could be used to boost lending.

“China’s June data alleviated concerns over a notable slowdown following last week’s RRR cut,” said Michelle Lam, greater China economist at Societe Generale in Hong Kong. “Given the decent set of data, the recent policy shift seems to be pre-emptive, as downward pressure on growth should continue to build given the easing credit impulse.”

MLF Operation

Earlier Thursday, the People’s Bank of China rolled over a portion of medium-term policy loans coming due, a move that confirms its intention to keep monetary policy largely unchanged. The 100 billion yuan of loans offered to banks is in addition to the liquidity from the reserve requirement ratio cut that comes into effect today.

The offshore yuan extended declines, falling 0.2% to 6.4714 per dollar. 10-year government bond futures slid 0.37, the most since May.

What Bloomberg Economics Says…

We expect the authorities to continue to steer the economy toward a soft landing. In practice, this will entail balancing financial stability risks with the need to keep the recovery going, making minor adjustments to policy levers but no aggressive easing.

Chang Shu, chief Asia economist

For the full report, click here.

Infrastructure investment slowed in the first half to 2.4% based on a two-year average from 2.6% in the first five months of the year, weighed down by the slow issuance of local government bond sales. Manufacturing investment growth strengthened to 2% from 0.6% on that basis, while credit tightening for property developers curbed investment in the sector.

The economy is expected to continue to slow as it stabilizes from last year’s historic slump and rapid recovery. Premier Li Keqiang sounded a cautious note this week about the outlook, warning the nation needs to prepare for cyclical risks and make counter-cyclical adjustments.

Becky Liu, head of China macro strategy at Standard Chartered Plc in Hong Kong, said the economy needs more support and there could be more RRR cuts to come.

“China’s growth is decent, but it’s not good enough, and the economy will likely moderate further from here,” she said. The market underestimated the central bank’s determination to ease monetary policy and support growth — the RRR cut is an obvious signal that China has entered an easing cycle. RRR is never one off, and I expect the PBOC to reduce RRR again by year-end.”