Gross Domestic Product grew by 6.2 per cent year-on-year in the second quarter as was widely expected. At the core of economic growth was infrastructure investment that grew to 5.8 per cent from 5.6 per cent.

Mining and railway investment grew by 22.3 per cent and 14.1 per cent year-on-year, respectively, which drove overall infrastructure investment and, in turn, the entire investment environment in China.

We also saw Industrial production reflecting this trend as ferrous and non-ferrous metal processing grew 10.3 per cent and 10.4 per cent year-on-year, respectively, while railway-related manufacturing grew 10.6 per cent.

That being said, the export environment has been melancholic due to an escalating technology war with the U.S. Mechanical and electronic products made up 55-60 per cent of China’s exports as from January to June 2019. Thus, the tech war is expected to hurt China’s exports substantially and might not change for the remainder of the year.

Retail sales spike, but for the wrong reasons

Given that exports did not remain the engine of the economy but infrastructure is now in the driving seat, some changes in the job market are likely to be seen.

How is consumption affected? Consumers are in fact spending more than usual.

Retail sales spiked by 9.8 per cent in June from 8.6 per cent. The figure looks encouraging but the details tell a different story.

There are signs that Chinese consumers have become more cautious about spending on leisure trips, signalling that consumers are potentially concerned about their job security and wage growth. Consumer items typically bought on overseas' leisure trips have been bought domestically.

Case in point, the current account shows that outbound tourism spending fell 8.7 per cent year-on-year in the first quarter of this year. Another example is that in Hong Kong, retail sales fell 1.3 per cent in May and have shrunk for four months in a row. That being said, it is still expected that retail sales in China will continue to grow at a good rate.

Another reason for the jump in retail sales in June was that China's car dealers cut prices, which boosted car sales 17.2 per cent after sales growth of just 1.2 per cent year-to-date. Price cutting cannot last for long and together with shrinking production, corporate earnings of car dealers and producers will suffer.

China's future depends on 5G

Industrial Production showed that smart devices fell by 6.9 per cent year-to-date and integrated circuits also fell 2.5 per cent year-to-date. This trend will not change unless there is a noteworthy improvement in added value in new smart devices which should come about when 5G is ready for use.

However, China faces obstacles in buying technology from its business partners and may have to invent the technology itself. This is not necessarily a bad thing as if Chinese tech companies are forced to develop new tech themselves, investment and production will likely grow.

It is then up to the Chinese consumers to choose which brand to buy. If China's 5G is at the vanguard of the world, it should be an easy decision for them.

The development of 5G and retail sales will have to continue to be under analysis before fine tuning forecasts. Until then, the Chinese economy will need to be driven by stimulus.

This article was issued by Maria Fenech, Investment Management Support Officer at Calamatta Cuschieri. For more information visit, https://cc.com.mt/ . The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.