Chinese growth beats forecasts but looks set to slow
China’s economy grew faster than expected in Q2 but we still expect credit tightening to lead to a slowdown in the second half of the year.
17 July 2017
Chinese growth once again surpassed expectations in the second quarter, growing 6.9% year-on-year (y/y), unchanged from the first quarter. This should ease fears over the ongoing credit tightening in China, though we still expect a growth impact to come through in the second half of this year.
Manufacturing growth accelerates
A key contributor to the growth surprise was much stronger-than-expected industrial production, at 7.6%, up from 6.5% y/y the previous month. Breaking the data down shows an acceleration within broad manufacturing, and within some but not all raw materials sectors.
So this does not necessarily seem to be a growth performance entirely reliant on “Old China”. This raises the upside risks to our forecast for 2017 of 6.6% growth; while we still expect real estate and infrastructure to slow, it seems increasingly likely that manufacturing may be able to compensate.
Positive surprise from retail sales and investment
Other high frequency data has also surprised to the upside this month, with both retail sales and fixed asset investment beating expectations. Investment saw a broad based acceleration with manufacturing investment continuing last month’s pick up, but real estate and infrastructure also turning around after slowing notably in May.
Arguably there are base effects at work but it is hard not to see this as a sign of resilience. Within retail sales there was a large jump in particular for communication appliances (20.1% y/y from 5.1% previously), with most other subcomponents weakening. Jumps in this series tend to be short lived so it will be interesting to see if broader retail sales can maintain momentum in the months ahead.
Slowdown likely in H2 as credit tightens
We are likely to revise up our growth forecast for China when we update our numbers next month, but we maintain our expectations for a slowdown in the second half of the year. Credit tightening continues, and generally impacts the economy with a lag; we as yet see no reason that this should not be true this year.
The strong Q2 growth performance should give the authorities the confidence to maintain their tighter stance for the time being. Indeed, the Financial Work Conference which concluded last week focused on deepening financial reforms and containing financial risks, with priority to be given to reduce leverage at state owned enterprises.
Softer global trade could weigh on manufacturing
It also seems likely that global trade will soften in the months ahead, at least in value terms, as the impact of the commodity price recovery fades. Export growth has a good relationship with manufacturing in China, so any slowdown would challenge a key support of China’s robust growth.
Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.