China’s econ­omy is on solid foot­ing

But cool­ing hous­ing mar­ket, slow­ing in­vest­ment raise flags

The Star Early Edition - - BUSINESS REPORT - Kevin Yao and Elias Glenn

CHINA’S econ­omy gen­er­ally re­mained on solid foot­ing last month, but tighter mone­tary pol­icy, a cool­ing hous­ing mar­ket and slow­ing in­vest­ment re­in­forced views that it will grad­u­ally lose mo­men­tum in com­ing months.

Still, with half a year left to go, Bei­jing is ex­pected to hand­ily meet its an­nual 6.5 per­cent eco­nomic growth tar­get with­out too many bumps – good news for Pres­i­dent Xi Jin­ping ahead of a ma­jor po­lit­i­cal lead­er­ship reshuf­fle later this year.

China’s fast start to the year led the In­ter­na­tional Mone­tary Fund yes­ter­day to raise its 2017 growth out­look for the coun­try to 6.7 per­cent from its 6.6 per­cent fore­cast in April, though it rec­om­mended China ac­cel­er­ate re­forms and rein in credit.

Credit and money sup­ply data yes­ter­day showed China may be mak­ing progress in the bat­tle against risky lend­ing and ris­ing lever­age as May bank loans topped ex­pec­ta­tions, but money sup­ply grew at the slow­est an­nual rate in more than 20 years, which the cen­tral bank at­trib­uted to delever­ag­ing.

Off-bal­ance sheet lend­ing, or shadow bank­ing ac­tiv­ity, also fell sharply last month af­ter ris­ing ear­lier in the year.

But the Peo­ple’s Bank of China said it will bal­ance delever­ag­ing with the need to keep liq­uid­ity ba­si­cally sta­ble, adding that slower money sup­ply ex­pan­sion could be a “new nor­mal”.

Slower fixed as­set in­vest­ment growth and a sharp de­cel­er­a­tion in hous­ing starts seen in data point to some of the cool­ing economists have been ex­pect­ing, though sta­ble growth in fac­tory out­put and re­tail sales, along with a pick-up in ex­ports, are cush­ion­ing the im­pact so far.

But a rise in in­ven­to­ries in the in­dus­trial sec­tor and weaker pro­ducer price in­fla­tion will drag on growth ahead, said Louis Kuijs, head of Asia eco­nomics at Ox­ford Eco­nomics in Hong Kong.

“The first half of this year was a very happy pe­riod for China in the sense that we had that won­der­ful in­crease in out­put prices,” said Kuijs, re­fer­ring in part to a con­struc­tion boom which boosted de­mand and prof­its of struc­turally un­healthy sec­tors such as steel.


Af­ter rolling out a slew of mea­sures ear­lier this year, rang­ing from short-term in­ter­est rate in­creases to a clam­p­down on riskier forms of lend­ing and shadow bank­ing, author­i­ties have ap­peared to pause in re­cent weeks as the gov­ern­ment looks to en­sure po­lit­i­cal and fi­nan­cial mar­ket sta­bil­ity be­fore a Com­mu­nist Party con­gress in China’s au­tumn. With slower nom­i­nal growth go­ing into next year, “the will­ing­ness to tighten sig­nif­i­cantly (fur­ther) on the mone­tary side will be pretty low”, Kuijs said.

In­dus­trial out­put grew at a steady 6.5 per­cent pace in May from a year ear­lier, de­fy­ing ex­pec­ta­tions for a slight soft­en­ing, as a gov­ern­ment in­fra­struc­ture spree con­tin­ues to boost de­mand for build­ing ma­te­ri­als from ce­ment to steel.

But ris­ing in­ven­to­ries are a risk. In April, growth in in­dus­trial in­ven­to­ries picked up by more than 10 per­cent. Weaker growth in fixed-as­set in­vest­ment – at 8.6 per­cent for Jan­uary to May – was led by a slow­down in the prop­erty sec­tor. While hous­ing sales rose by an un­ex­pect­edly solid 10 per­cent, growth in new con­struc­tion starts al­most halved to 5.2 per­cent last month, ac­cord­ing to cal­cu­la­tions.

An­a­lysts ex­pect the hous­ing mar­ket to con­tinue to slow, as the gov­ern­ment re­mains wary of still-ris­ing home prices and has main­tained strict con­trols on home pur­chases and prop­erty fi­nanc­ing.

In­fra­struc­ture spend­ing, a key lever for the gov­ern­ment to sta­bilise growth in the face of any slow­down, slowed to 20.9 per­cent growth over the first five months of the year.

Growth of pri­vate in­vest­ment slowed slightly to 6.8 per­cent in Jan­uary-May, sug­gest­ing a slight weak­en­ing of the pri­vate sec­tor’s ap­petite to in­vest as small- and medi­um­sized pri­vate firms still face chal­lenges in ac­cess­ing fi­nanc­ing and ris­ing fund­ing costs.

Re­tail spend­ing was more up­beat, ris­ing 10.7 per­cent from a year ear­lier, un­changed from April and beat­ing an­a­lysts’ ex­pec­ta­tions for a de­cline de­spite the first back-to-back drop in car sales since 2015.

Fo­cus on tar­get

Economists at No­mura fore­cast China’s econ­omy will grow an an­nual 6.8 per­cent in the sec­ond quar­ter, only marginally less than the 6.9 per­cent in the first quar­ter and pro­vid­ing enough mo­men­tum to coast to the gov­ern­ment’s full-year tar­get even if there is some sec­ond-half soft­en­ing.

Fund man­agers sur­veyed by Bank of Amer­ica Mer­rill Lynch said China’s credit tight­en­ing ranked as the top tail risk for fi­nan­cial mar­kets for the sec­ond month in a row, with nearly two-thirds of re­spon­dents say­ing it will slow Chi­nese busi­ness ac­tiv­ity but have lit­tle im­pact on global growth. – Reuters

Slower fixed as­set in­vest­ment growth and a sharp de­cel­er­a­tion in hous­ing starts point to cool­ing


Build­ings on the Shen­zhen side of the bor­der in the Ma Tso Lung district of Hong Kong. Con­struc­tion starts al­most halved.

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