China’s economy is on solid footing
But cooling housing market, slowing investment raise flags
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, Slower fixed asset investment growth and a sharp deceleration in housing starts point to cooling 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. Stability 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 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 ana- lysts’ 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