Facing a multitude of headwinds at home and abroad, from floods along the Yangtze River, to coronavirus outbreaks in the West, and an inability to stimulate domestic demand, analysts said China’s economic recovery lost its head of steam in July.

While the economy is still growing, it is being powered largely by the old levers of property and infrastructure investment, with President Xi Jinping’s stated aim of “dual circulation”, where China is powered by local demand, yet to kick into gear.

Instead, retail sales remain suppressed, shrinking by 1.1 per cent in July compared to a year earlier, meaning sales have yet to expand in any of the seven months of 2020.

Analysts warned of new slumps as the government cracks down on food wastage by forcing restaurants to serve fewer dishes, and tightens food imports due to fears of the coronavirus being imported on food products.

Coronavirus was found on Brazilian chicken wings imported into Shenzhen this week, the third such instance on foreign meat or seafood in seven days, meaning more tightening in the imported food supply is likely.

“Retail sales will probably be worse next month, because of the new central government campaign to reduce food wastage in the restaurant sector,” said Imogen Page-Jarrett, an analyst at the Economist Intelligence Unit. “Domestic demand remains weak, and the main driver of economic activity is state-led investment and stockpiling of industrial goods and commodities.”

However, Shen Jianguang, chief economist at JD Digital, said Xi's drive for food security may not have a significant impact on the consumer market.

“Reducing waste does not mean no consumption, but more reasonable consumption,” he said. “China once restricted using public money for private consumption, but it did not affect the level of spending on [Chinese baijiu brand] Mao-tai in the end.”

The world’s most populous nation has struggled to get consumption back on track after closures of restaurants, shops and cinemas over the early months of the year. Industry, on the other hand, has bounced back strongly and grew 4.8 per cent in July, the same level as in June, but at a lower rate than expected.

Some factories were up and running by the end of February, while cinemas were only reopening in July,after earlier efforts were aborted due to fears of infections.

In this regard, some view China’s vaunted recovery, in the sense that it is inflated by property and infrastructure investments – much of which is fuelled by debt– as overhyped.

“I think it shows that the recovery narrative has been overplayed. While China is still expected to experience a moderate expansion in 2020, thanks in part to its massive domestic market, it is not completely immune to the impacts of a global economic recession,” said Carlos Casanova, Asia-Pacific economist at insurer Coface.

Beijing has refrained from blowing open the floodgates of stimulus as it did post-financial crisis, but it did gradually inject more and more money into the economy as the first half of the year went on.

Policymakers are concerned about pumping too much debt into an already highly-leveraged economy, but chronically sluggish demand means the foot should remain on the gas, analysts said.

“We believe markets are somewhat too optimistic on China’s economic growth in the second half of the year,” said Lu Ting, chief China analyst at Nomura.
“The July Politburo meeting adds conviction to our view that it’s still too early for Beijing to roll back the easing and stimulus measures it introduced in the first half.”

Lu pointed to the widespread floods that devastated communities along the Yangtze River as being a weight on infrastructure investment, the most trusted lever at Beijing’s disposal, while he also suggested declining shipments of medical goods, the likely necessity of further social distancing in China as new pockets of coronavirus emerge and spiralling US tensions as obstacles to growth.

Xu Hongcai, deputy director of the Economic Policy Commission at the China Association of Policy Science, agreed that consumer demand was still insufficient.

“China’s recovery is still ongoing, but not so strong any more,” he said. “Everyone is worried about employment, and income is declining, so everyone dares not to spend much money.”

In other data released by the National Bureau of Statistics on Friday, fixed asset investment – a cumulative measurement of expenditure on infrastructure, property and capital goods in the year so far – fell by 1.6 per cent over the first seven months of 2020, while the official surveyed jobless rate for July was 5.7 per cent, the same as in June.