KURE - China's full-year GDP target may be beyond reach after Q2 slowdown

Bucking a trend across most of global equities, Chinese stocks have rallied since the beginning of May as severe COVID-19 lockdowns came to an end. Some of that optimism may be running out, however, as cracks appear in the world's second-largest economy. Data on Friday revealed a country that narrowly avoided a contraction in the second quarter, while investors continue to be rattled by the latest developments in China's real estate sector. Shanghai -1.6% to 3,228.

Snapshot: Gross domestic product for Q2 grew at a tepid 0.4% Y/Y, missing forecasts of a 1.0% gain and marking a sharp slowdown from the 4.8% growth notched Q1. It was also the worst showing for China since it began the data series in 1992, barring a 6.9% contraction in Q1 of 2020, shortly after the pandemic began in Wuhan. Analysts now say the official growth target of around 5.5% for 2022 will be hard to attain without ditching its strict zero-COVID strategy, which can have knock-on effects for countries across the globe (especially those highly dependent on Chinese commodities and manufacturing).

"China's economy has stood on the edge of falling into stagflation, although the worst is over as of the May-June period. You can rule out the possibility of a recession, or two straight quarters of contraction," said Toru Nishihama, chief economist at Dai-ichi Life Research Institute in Tokyo. "Given the tame growth, China's government is likely to deploy economic stimulus measures from now on to rev up its flagging growth, but hurdles are high for PBOC to cut interest rates further as it would fan inflation which has been kept relatively low at present."

Additional worries: Things continue to look shaky in China's capital-starved property sector, which makes up nearly a quarter of GDP by some estimates. A growing number of homebuyers across the country are halting mortgage payments until developers resume construction of unfinished apartments, with the strike (and fears of hefty writedowns) weighing heavily on bank stocks. Home prices growth in June stalled on a monthly basis, while property investment contracted for a fourth straight month and sales slumped by another massive 18.3%.

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