There’s a lot going on in China
In China we have seen a significant slowdown in the growth of key activity data since late last year. That has seen the Government step up the easing of financial conditions with a total of four interest rate cuts since late last year, along with reductions in the required reserve ratios (RRR) of the banks and a number of fiscal stimulus measures. We are now seeing early signs of stability in the Chinese property market and, with that, the broader economy. We don’t believe the recent correction in the China share market will significantly alter the outlook.
The month of May saw the first increase in residential property prices since April last year. We have long suggested that stability in the property market is a necessary precursor to broader economic stability. Indeed, recent data also showed modest improvements in industrial production, money supply growth, exports and the important forward looking manufacturing surveys. However, disinflationary forces as a result of still significant excess capacity remain strong and labour market indicators remain soft.
China residential property prices
70-City Index, percent change
This improved data has coincided with significant volatility in the mainland share market which saw the market rise 150% over a 12 month period to its peak, followed by a 30% fall over the past few weeks. While volatility, especially of this magnitude, could be unsettling, we believe the impact on the Chinese economy will be limited for a number of reasons:
Firstly, the significant rise in the share market didn’t have much impact on the economy, so it’s hard to see why this correction would.
Secondly, the share market is still up 90% from a year ago, so investors who have been fully invested over the entire period are still sitting on significant gains. The same can’t be said for more recent entrants into the market.
Thirdly, shares only represent around 10-15% of total household wealth. That means the recent stability in the housing market is a far bigger story than the recent volatility in the share market.
There’s a lot going on in China at the moment. Growth is slowing which regular readers will recall we think is a good thing – a slower China is a more sustainable China. But at the same time, China is navigating a rebalancing of the economy along with liberalisation of its financial markets. The occasional wobble should not be a surprise.
Official China GDP growth came in at a higher-than-expected 7.0% in the year to June, the same level as the year to March. Given the recent stabilisation in the activity indicators it appears growth for calendar year 2015 will came in close to the official target of 7.0%.
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