1. Data dump – Q2 GDP
China’s stats bureau released the Q2 GDP results on Thursday.
The economy expanded 7.9% y/y in real terms last quarter – down from 18.3% y/y growth in Q1.
- Slower sequential growth is no surprise given the less favorable base effect in Q2.
Given the pandemic-related distortions to the data, it is better to look at two-year averages:
- The two-year geometric mean of GDP growth in Q2 was 5.5% y/y – up from 5.0% y/y in the first three months of the year.
- On a seasonally adjusted basis, q/q growth in the second quarter also picked up, hitting 1.3% versus 0.4% q/q at the start of the year.
Panic over? Markets were concerned that last week’s RRR cut was a sign that growth had started to rapidly deteriorate toward the end of the quarter.
- While the Q2 print came in slightly below consensus forecasts of 8.0% y/y growth, it still looks pretty solid to us.
But investors should still be cautious: A drop in overseas purchases of Chinese manufactured goods would undermine a key pillar of growth going forward.
Go deeper: For more in-depth analysis of the numbers, check out today’s (and everyday’s!) China Markets Dispatch.
2. CPPCC prepares for mid-year economic review
The Politburo’s mid-year economic review is fast approaching.
The latest indication: On Wednesday, Wang Yang, Politburo Standing Committee member and head of the political advisory body (CPPCC), held a symposium to discuss the economy.
- The heads of four of China’s other officially recognized political parties.
- Economist and government advisor Justin Lin Yifu.
- Representatives from the major economic ministries, including the macro planner (NDRC), industrial regulator (MIIT), commerce ministry (MofCom), science ministry (MoST), and market regulator (SAMR), among others.
Pay attention: The CPPCC’s role in policymaking is often overlooked (if not outright disparaged).
- In point of fact, it’s an important player in the policymaking process, and provides an important avenue to get policy proposals to the top leadership. Yes, really.
This could be big: The China National Democratic Construction Association put forth a proposal on “building a unified national market.”
Why that matters: Local protectionism remains a huge problem in China, creating a badly fragmented national market.
- One example – whereas most countries have a handful of auto manufacturers, China has scores of them.
Get smart: If China could create a national unified market, it would be a major boon to overall macroeconomic efficiency.
But don’t hold your breath: Wang Yang vowed to smash protectionism…back in 2002.
3. Review the audit
On Wednesday, Premier Li Keqiang did what he happily does every Wednesday: Preside over the weekly executive meeting of the State Council.
This week’s sexy agenda item: Rectifying issues discovered in the central budget implementation audit.
Some context: The recently concluded audit looked into budget implementation, fiscal expenditures, and state asset management.
More context: The audit apparently revealed evidence of tax evasion and the illegal resale of certain commodities for profit.
Li said the illegal activity (Gov.cn):
- “[D]isturbed the normal market order and fair competition and violated tax collection principles.”
He further called to:
- “Strengthen the supervision of implementation and audits…so as to address both symptoms and root causes.”
The results of the rectification and reform initiative will be reported to the State Council by the end of October.
Get smart: Amid the abstract rhetoric, Li basically wants to make sure that fiscal spending is deployed with minimal waste and minimal fraud.
The big picture: The Party-state has been tackling the symptoms of corruption, and trying to rip out its root causes, for decades. Despite intensified efforts under Xi Jinping, deep problems remain.
4. Knock, knock. It’s the United States.
On Wednesday, the State Council issued a white paper examining the state of human rights in Xinjiang.
Here’s a shocker: The paper, subtly entitled “Respecting and Protecting the Rights of All Ethnic Groups in Xinjiang,” found that things in the far west region were hunky dory (Xinhua):
- “The ethnic groups in Xinjiang unite and work together to achieve common development and prosperity.”
- “The political, economic, social, cultural, and many other rights of the people of every ethnic group are effectively guaranteed.”
Good, glad that’s settled.
But there was one party pooper that didn’t quite buy into the hype.
Also on Wednesday, the US Senate unanimously passed the The Uyghur Forced Labor Prevention Act.
- The legislation would ban the import of all goods produced in Xinjiang unless importers can prove they weren’t produced with forced labor.
Some context: On Tuesday, the US State Department issued a warning to businesses about the risks of Xinjiang-based supply chains and investment links.
Get smart: Beijing’s white paper will gain exactly zero traction in Western capitals…least of all Washington.
The big question: With the US leaning ever more heavily into punitive economic measures, how long before Beijing strikes back with its fancy new counter-sanctions toolkit?
5. Li Keqiang wants more stuff to go to the countryside more quickly
There was plenty more on Premier Li Keqiang’s mind at Wednesday’s executive meeting of the State Council (see entry #3).
Notably: Delivery logistics in rural areas.
Li wants better logistics to improve an age-old, two-way street:
- Rural areas send agricultural goods to urban areas.
- Urban areas send consumer goods to rural areas.
Li promoted a regional approach (Gov.cn):
- “In rural areas in east and central China, the role of market forces will be better leveraged and enterprises will be guided in setting up outlets in villages.”
- “In rural areas in west China, postal service providers need to fully play their basic role in the last-mile delivery and cooperate more closely with sectors such as express delivery and supply and marketing, to extend delivery services to more villages.”
Li also pledged more government support:
- “While adhering to market-oriented methods and competitive development, we should also place greater emphasis on the provision of public services.”
- “Support will be provided to improve relevant infrastructure in rural areas.”
Get smart: China’s vast network of delivery services has long been considered a prime way to better integrate rural and urban markets.
The big picture: Modernizing and diversifying rural economies is key to Xi Jinping’s flagship rural revitalization strategy.
6. MIIT announces plan to build data center clusters
On Wednesday, the Ministry of Industry and Information Technology (MIIT) issued a three-year plan for building a massive network of data centers across the country.
The constraint: Data centers consume a lot of energy and Beijing wants them to be as “green” as possible.
Andthere is a supply-demand mismatch:
- Metropolitan areas have high demand for low-latency computing, but lack clean energy resources.
- Some northwestern areas have a ton of clean energy, but low demand for computing.
MIIT’s solution: Pick the right spot to build data centers with different purposes
- The Yangtze River Delta, Beijing-Tianjin-Hebei Region, Greater Bay Area, and Chengdu-Chongqing Economic Circle will build data centers for low-latency computing.
- Data centers in Guizhou, Inner Mongolia, Gansu, and Ningxia will handle less demanding requirements for computing.
MIIT also called for using green technologies – such as energy-efficient cooling systems – when building data centers.
Get smart: This plan works in theory, but hammering out the details won’t be easy.
- Bitcoin miners, for example, were just whacked for being too energy-intensive (among other reasons).
Get smarter: The buildout of data centers underpins China’s broader tech initiatives – such as smart cities and autonomous driving – and regulators are committed to getting it right.
7. You sure this is right?
Let’s get into the nitty-gritty of China’s carbon market launch, delayed from June.
On Wednesday, Zhao Yingmin, Vice Minister of Ecology and Environment (MEE), discussed the importance of data authenticity and accuracy in the national emissions trading scheme (ETS).
- Zhao called accurate data the market’s foundation and top priority.
- He also reiterated the market’s July launch, but we covered that yesterday.
Some context: We heard that one reason for the ongoing delay was the submission of fabricated data.
Zhao listed several measures the MEE has implemented to root out fake data, including:
- Issuing standards for accounting and reporting carbon emissions for enterprises
- Ordering provincial counterparts to verify data submitted by enterprises
- Conducting on-site spot checks of these firms
It’s not just enterprises under scrutiny:
- The MEE also inspects its provincial counterparts responsible for verifying submissions.
The MEE recognizes that there’s always an incentive to falsify data when benefits outweigh consequences:
- That’s why it’s pushing for the early release of interim measures to increase penalties for data falsification, and will enhance its supervisory capacity.
Get smart: Data quality is a dull topic, but it’s the cornerstone of any market.
Get smarter: Expect the MEE to sort this out before expanding the national ETS’s coverage.