Pick up in growth re­duces need for fur­ther pol­icy eas­ing

China Daily (Canada) - - FRONT PAGE -

Wed­nes­day’s data on GDP growth beat ex­pec­ta­tions and growth in in­dus­try picked up again re­cently on a monthly ba­sis, sug­gest­ing that the pol­icy eas­ing mea­sures taken since late last year are start­ing to have an ef­fect. GDP growth in the sec­ond quar­ter was held back by con­tin­ued weak­ness in in­vest­ment, while ex­port mo­men­tum slowed but pri­vate con­sump­tion held up bet­ter. In the hous­ing mar­ket, sales growth re­mained brisk in June. How­ever, amid still high in­ven­to­ries of un­sold hous­ing, hous­ing con­struc­tion is not yet ben­e­fit­ing from the bet­ter sales growth. On the other hand, in­fra­struc­ture in­vest­ment ben­e­fits from its key role in the gov­ern­ment’s pol­icy ef­forts to sup­port growth.

But the down­ward pres­sures on growth stem­ming from the weak­ness in in­dus­try amidst the prop­erty down­turn have been damp­ened by the ro­bust ex­pan­sion of the ser­vice sec­tor. Value added in the ter­tiary sec­tor sig­nif­i­cantly out­grewthat in the sec­ondary sec­tor in the first half of 2015, es­pe­cially in nom­i­nal terms, due to large dif­fer­ences in pric­ing power. With em­ploy­ment in in­dus­try not grow­ing any­more, job cre­ation in the ex­pand­ing ser­vice sec­tor is crit­i­cal to sup­port ur­ban job growth and the mi­gra­tion of work­ers from the ru­ral ar­eas.

The still rea­son­ably healthy ur­ban job mar­ket sup­ports con­tin­ued solid growth in wages and con­sump­tion. How­ever, a sig­nif­i­cant slow­ing of pas­sen­ger car sales in re­cent months points to a risk that con­sumer con­fi­dence may be af­fected by the lin­ger­ing weak­ness in in­dus­try. Go­ing for­ward, the stock mar­ket tur­moil may also af­fect con­sump­tion some­what.

The strong show­ing of the ser­vice sec­tor is nec­es­sary and sus­tain­able. With the weak growth in in­dus­try, solid ex­pan­sion this year, while Con­sumer Price In­dex, a gauge of in­fla­tion, should end the year at around 1.8 per­cent.

Of course, risks to growth re­main. In­ter­na­tion­ally, the key risks re­main global mon­e­tary and ex­change rate up­heaval and weaker-than-ex­pected global trade growth. In China it­self, the risks of a more pro­nounced real es­tate down­turn and a ma­te­rial de­cline in in­fra­struc­ture in­vest­ment have re­ceded, in part be­cause of the re­cent ac­tions and plans of pol­i­cy­mak­ers. How­ever, the risk re­mains that the weak­ness in the in­dus­trial sec­tor will spill over into the broader econ­omy, via chan­nels such as the la­bor mar­ket and con­fi­dence. The eco­nomic im­pact of the stock mar­ket tur­moil on the real econ­omy is man­age­able, but, as noted, the im­pact via lower ac­tiv­ity in the fi­nan­cial sec­tor is quantitatively sig­nif­i­cant.

Macroe­co­nomic pol­icy is likely to main­tain an eas­ing bias in the com­ing months to en­sure that GDP growth will not fall back again. Thus we can ex­pect con­tin­ued ef­forts to boost in­fra­struc­ture fi­nanc­ing. The re­cent stock mar­ket tur­moil will by it­self also tend to call for an easy mon­e­tary pol­icy stance. But the re­cent pickup in growth in in­dus­try makes sig­nif­i­cant fur­ther stim­u­lus steps un­likely, while the scope for in­ter­est cuts is lim­ited. We may see one more 25 ba­sis points cut in bench­mark in­ter­est rates this year. But even at their cur­rent level of 2 per­cent, bench­mark de­posit rates will re­main just above in­fla­tion in early 2016. This lim­its the scope for fur­ther rate cuts, since the cen­tral bank tra­di­tion­ally does not like to see neg­a­tive real bench­mark de­posit rates for a long time. On the other hand, the stance with re­gard to liq­uid­ity man­age­ment and bank lend­ing is likely to re­main gen­er­ous. The au­thor is China economist at the Royal Bank of Scot­land.

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