Daily Management Review

China Second Quarter Growth Strength Surprises Many but Also Reveals Growing Risks


07/15/2016




China Second Quarter Growth Strength Surprises Many but Also Reveals Growing Risks
With suggestions emerging that future weakness which could pressure the government to roll out more support measures, in the second quarter private investment growth shrank to a record low in China even though the country’s economy expanded slightly faster than expected in the same period.
 
With growth cooling for a second month, signs of fatigue were evident in the investments in property in the month of June. Spurring demand for products from cement to steel, property investment has given the world's second-largest economy a welcome boost in recent months.
 
The world would be even more vulnerable to the risk of a global recession due to a further slowdown in China and any major fallout from Brexit, worry investors, while fears of a hard landing have eased.
 
Data showed that even though the growth in Chinese economy remained unchanged from the first quarter and stood at 6.7 percent in the second quarter, it was but still the slowest pace since the global financial crisis.
 
As businesses retrench in the face of the sluggish economic outlook and weak exports, growth in investment by private firms fell to a new record low in the first half of the year. Private investments account for over 60 percent of total investment in China.

"While there was a big pick-up in retail sales, the slowdown in fixed-asset investment is a worry. Given the slide in fixed-asset investment growth, I'm inclined to keep my forecast of slowing growth over the course of the year," said Tim Condon, chief economist for Asia at ING in Singapore.
 
Noting the weakest growth since March 2000, fixed asset investment growth in the first half slowed to 9 percent.
 
"We think GDP growth is likely to slow in Q3 and may rebound in Q4 driven by post-flood reconstruction activity. But the rebound will not last long," said Nomura economist Wendy Chen.
 
First-half performance lays a good foundation for achieving the government's full-year growth target of 6.5-7 percent, said China's statistics bureau which also said that the economy still faces downward pressure. However market watchers believe that the full-year growth target of 6.5-7 percent is ambitious.
 
"Solid GDP in Q2, which is likely to have been led by property and construction, is unlikely to be sustained. Property investment grew 6.1 percent in the first six months, lower than 7.0 percent in January-May. Therefore, the property-led recovery has ended," economists at ANZ said in a note.
 
The worries about the country's mounting debt levels and delays in reforming the bloated and inefficient state sector were compounded by the government having had to do more of the heavy lifting to support growth with private investment shrinking despite the policymakers saying that the economy remains largely steady.

While government spending rose 19.9 percent in June, Chinese state firms hiked investment 23.5 percent in the first half of the fiscal.
 
Long-ailing manufacturers have been aided by the spending spree and higher commodity prices. Beating expectations for a marginal easing, industrial output growth rose to 6.2 percent in June from a year earlier.
 
While Chinese banks extended more loans than expected, driven largely by mortgage demand, retail sales growth also accelerated to 10.6 percent, easily beating expectations.
 
For Beijing's efforts to rebalance the economy away from its past reliance on investment and exports, a pickup in consumption and the services sector is one bright spot. Compared to 66.4 percent last year, final consumption accounted for 73.4 percent of China's first-half economic growth.
 
"The economic structure continues to improve, the share of the services sector continues to increase. This trend should continue," said Nomura's Chen.
 
(Source:www.reuters.com) 






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