China GDP Preview

China's growth is expected to have slowed substantially in the last quarter, with attention on potential contagion among commodity suppliers.

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Shaking up the markets

There are several key economic figures expected from China in the early hours of tomorrow. Each on its own could move the markets, but the one that is likely to get the most attention is the GDP figure. China is the first major economy to report its economic growth figures for the second quarter but is in a somewhat unique situation that likely doesn't correlate with other countries.

China experienced rolling lockdowns through most of the quarter. According to PBOC official Lan, the economy bottomed out in May. We still don't have a full suite of data from June to see how much of a rebound there was. Even so, Q2 GDP is forecast to come in negative for the first time since the start of the pandemic, but annual GDP is expected to remain positive.

Going beyond the data

The consensus is that China will report a quarterly Q2 GDP contraction of -1.5% compared to 1.3% growth in the first quarter. The housing industry, in particular, has been hit hard, ever since the Evergrande debacle, most major developers have been reporting contracted sales down by 30-40% year over year.

Of course, the Chinese industry is a large consumer of raw materials, such as steel and coal. But the construction industry arguably takes up a substantial portion of the demand for those materials, as well as other elements such as copper. LME inventories have been rising, even though June when the industry was supposed to have started ramping up production.

Despite the slowdown, Chinese demand for Australia's raw materials hasn't diminished. The supposed bottom of the covid-induced slowdown in May actually saw an increase in iron ore and coal exports through Port Hedland over the prior month.


A50 rejection at 200-SMA

China’s A50 index was recently rejected at the 200-day average near 15000, but it had soared all the way up from 12500 following a bullish divergence. The bullish attempt saw prices revisiting the 14500-1650 1-year range, but bears were quick to react and send prices back down following an engulfing pattern, potentially targeting the 50-day average near 13800.

Bulls have a bit of a task in breaking the 200-SMA as it coincides with the descending trendline resistance coming down from 20600. Getting past that would expose the top of the range at 16500, then 18000. Should the short-term decline continue though, 12500 is major support second to the 50-SMA. In the interim, bears could take a break near 13600.

Source: Spreadex trading platform

Key takeaways

China is expected to report a negative GDP quarter for the first time since the pandemic began but to be positive year on year. However, the economy may not have rebounded as much as previously thought as the housing industry has been hit hard unless Chinese demand for Australia’s raw materials offset the contracting housing sales.