China’s hot growth summer will probably disappoint

It jokes with data from Wind showing a huge increase in issuance of local government bonds over the past six weeks; Infrastructure investment may pick up further in June.

Second, industrial production picked up, helped by a boom in exports and auto production. The year-on-year decline in auto sales declined to 12.6% in May from 47.6% in April. Given that the government has just announced a major tax cut on auto sales, effective this month, the June numbers will continue to improve.

but even assuming in reopening and avoids hiccupsThere are still a number of major problems, which mean that the rebound in growth in the third quarter is likely to be modest.

First, the People’s Bank of China is still acting cautiously, despite a clarion call from Premier Li Keqiang and other top officials to support the development. The central bank once again confused analysts’ expectations for a rate cut in its key medium-term lending facility along with today’s data release.

Concerns about further yuan weakness – with the potential to trigger large capital outflow The Fed still appears to be in the hands of the central bank—in the rate-hiking cycle. After the PBOC announced a cut in banks’ reserve requirements in mid-April, small rates and corporate bond yields fell sharply – but so did the yuan, which rose 6% against the dollar from mid-April to mid-May. fell over.

Since then, the currency has stabilized, but bond yields have started to rise again. If the rapid clip of local government debt issuance is going to continue – net issuances of more than 700 hundred billion yuan ($104 billion) in both May and June according to Wind, the two highest monthly totals since mid-2020 – more Liquidity will be required from the PBOC to avoid other borrowings.

Also, local governments are increasingly using their annual “special project” bond issuance quotas. in combination with weak land sales, another important source of municipal funding, which adds up to a The rising “fiscal rock” In the second half of the year, noted research consulting firm Capital Economics.

Beijing will either have to bring forward a larger part of next year’s planned quota or take other strong measures to bolster local government finances. Another option – allowing more off-the-book borrowing by city governments – would be difficult as long as bond yields remain high, and Beijing’s concerted effort to rein in such practices has over the past five years. will also weaken

China’s growth looks like it’s down for now, except for another major COVID outbreak this summer. But unless the PBOC is willing to risk more yuan depreciation, and policymakers act to sharply bolster local government finances, a weak rebound in the third quarter is still the most likely scenario.

write to Nathaniel Taplin nathaniel.taplin@wsj.com