Welcome to Thoughts on the Market. I'm Robin Xing, Morgan Stanley's chief China economist. Along with my colleagues, bringing you a variety of perspectives, I will be talking about China's growth hiccup in the second quarter in a year of recovery.
It's Wednesday, June 23rd at 8p.m. in Hong Kong.
For the last few months, my strategist colleagues have noted that markets have placed a lot of focus on the economic recovery in the U.S. But as the second largest economy in the world, China promises to be the other key driver for global growth.
China's recovery since last year has been strong but quite uneven with its manufacturing output recovered to above the potential trajectory, way ahead of its consumption. That means consumption recovery has not reached the end of the runway.
However, for the second quarter this year, China's growth is tracking weaker than we initially expected. This has prompted some to ask, is China's recovery losing momentum? Our answer at Morgan Stanley research is "no." We are still more optimistic than consensus for the growth in full year 2021. This is thanks to sustained momentum in manufacturing capex and a broader consumption recovery - particularly in services sectors.
So let me dive into this recovery debate. While there has been a brief hiccup in consumption recovery in recent months, the short answer for that is good sales are normalizing after pent-up demand during pandemic on big-ticket items like cars and smart phones and the home electronics have been satisfied, which is very natural. But it's the services recovery which came in slower than expected with the stop-start lockdown cycles. So the path towards a full return to pre-COVID trajectory has been jagged, with the handoff from goods to services disrupted by COVID resurgence. For instance, the unexpected Delta variant resurgence in Guangdong province has led to some targeted lockdowns, dragging on the service sector recovery. This is evident by the sluggish catering and tourism growth. In particular, China's retail sales is still 4 percentage point below its trend level, and catering alone accounts for an outsized 25% of that gap. And the recent data variant resurgence in Guangdong and Shenzhen, China's southern industrial hubs could also drag down China's national air travel by as much as 5%.
However, what's interesting is the recent COVID resurgence has also served as a wakeup call for the public awareness of vaccination. Since the initial outbreak in early May, China has been accelerating the pace of vaccination. The daily run rate picked up to about 20 million doses. And that means with the recent government campaigning and the increased public awareness, China could probably reach about 80 to 90% coverage ratio on vaccination by end of this year. This could help better protection against the resurgence and reduce the need for the stop-start lockdown cycles.
So we think the consumption recovery will be still intact in the second half of this year, given that there could be further normalization of services sector reopening. Of course, this hinges on whether policymakers would adopt a change of their "COVID-Zero" approach with faster vaccination, which could eventually facilitate broader service sector recovery.
So the bottom line is we expect China's recovery to continue after the hiccup in the second quarter, as there could be less stop-start lockdown cycles with more vaccination. We maintain a slightly more bullish annual growth forecast of 8.8% in GDP versus the consensus.
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