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China growth stable, investment slowdown the major headwind

18 July 2016
Growth in the Chinese economy was stable into the second quarter of the year, though there are signs of mounting headwinds, especially with respect to private sector investment. Further policy easing seems inevitable despite receding deflationary pressures.
The economy expanded at an official 6.7% pace in the year to June, the same rate as the year to March. Quarterly growth picked up to 1.8% in the June quarter from 1.2% in the three months to March.  There was a more notable improvement in the nominal data with annual growth improving from 7.2% to 8.5% between March and June.

Source: NBS

The sectoral breakdown remains much the same story with the “old China” sectors of industrial production and investment slowing significantly, while retail sales and services are still holding up in a relative sense. The monthly activity data showed a pick-up in industrial production (6.2% in June vs 6.0% in May) and retail sales (10.6% vs 10.0%) into the end of the quarter. However, fixed asset investment remained lacklustre (9.0% vs 9.6%). 
The forceful stimulus behind the growth numbers is evident in the 14.4% increase in new loans over the 12-month period along with the budget deficit widening out to a record low of -4.2%. The authorities are throwing considerable resource at managing the pace of the slowdown in growth. The surge in new loans will be helpful for stabilising growth at the margin, though loan demand is materially lower than in previous years.

Source:  PBoC

Rising loan growth is contributing to concerns about debt sustainability, especially in the corporate and local government sectors. The bulk of the corporate debt belongs to the State Owned Enterprises (SOEs) which are large and cumbersome, and suffering from over-capacity. We think China’s debt issues are manageable but need swift action, especially in the form of further SOE reform.
The weaker Renminbi (RMB) is also helping to stabilise growth. On a real effective basis the RMB is down 5.5% since the peak in September last year. China’s exporters will benefit from a weaker currency, in the same way that they have suffered from a stronger currency in recent years.
The latest round of depreciation of the RMB has so far not stirred up the same reaction as in August last year or January this year. This partly reflects adjusted expectations: August was a complete surprise and the People’s Bank of China (PBoC) is working to reassure the market that a collapse in the RMB is unlikely. Indeed, the PBoC has learnt a lot since the August move and has demonstrated a willingness and ability to stand in front of excessive moves. 
The biggest headwind to growth remains the weakness in private investment and is the key reason for our expectations of a continued gradual move lower in GDP growth over the remainder of the year. We expect further monetary easing in the months ahead to continue to manage the growth slowdown. We don’t see the receding deflationary pressures in producer prices as a barrier to that easing as CPI inflation remains well in check.

Source:  NBS

This blog post has been prepared to provide general information and does not constitute 'financial advice' for the purposes of the Financial Advisors Act 2008 (Act). An individual investor should, before making any investment decisions, consider the information available in the relevant Product Disclosure Statement and seek professional advice. While every care has been taken in the preparation of this document, AMP Capital Investors (New Zealand) Limited and the AMP Group (together, 'AMP') make no guarantee that the information supplied is accurate, complete or timely and do not make any warranties or representations in respect of results gained from its use. The information is not intended to infer that current or past returns are indicative of future returns. The views expressed are those of the author and do not necessarily reflect those of AMP. These views are subject to change depending on market conditions and other factors.

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