After China's record year-on-year GDP increase in Q1 (thanks to the base effect and a massive credit impulse), Q2 GDP was expected to slow sharply (especially given the suppression of investment/real estate deleveraging and the collapse of the credit impulse).

Fears were heightened after the People's Bank of China surprised last week by cutting the cash reserve requirement (RRR) that banks must hold as a reserve, a move aimed at boosting lending by banks. The move has been interpreted as a further sign that the Chinese economy's post-pandemic recovery could be weaker than expected.

Now, so far, fears of a sharp slowdown seem exaggerated: the official data set for the month of June remained in good shape (2-year smoothed data), with solid credit growth, still solid trade, and sequential improvement in industrial activity and retail sales.

• Real GDP posted a two-year annualized growth rate of 5.5% in the second quarter, up from 5.0% in the first quarter.
• Total credit growth registered 11.7% in June compared to 11.6% in May.
• Industrial value added decreased to 6.5% in June from 6.6% in May.
• Exports in renminbi terms grew to 11.8% in June from 9.3% in May.
• Fixed asset investment rose 6.0% in June, after 4.8% in May.
• Retail sales improved to 4.9% in June from 4.5% in May.
• Property sales volume declined to 4.8% from 9.4% in May.
• Construction starts increased 2.3% after a 1.9% drop in May.

Looking ahead, some risks persist mainly on the investment side which is related to a credit slowdown in recent months, a slowdown in the housing market, the impact of decarbonization and cost pressures for downstream sectors amid a rise in PPI (producer prices). Beyond that, as the macroeconomic policy bias shifts from the tightening stance in the first part of the year to a neutral stance going forward, credit momentum is expected to stabilize in Q3 and increase modestly in Q4. Together with consumption and services, as well as ongoing constructive global demand conditions, we expect economic activity to pick up later this year.

The business cycle remained virtually stable in the second quarter