22 March 2019
Housing sales may cool off in the second half of the year, exerting a drag on economic growth. Photo: CNSA
Housing sales may cool off in the second half of the year, exerting a drag on economic growth. Photo: CNSA

China growth unlikely to hit bottom before first quarter of 2017

China’s second-quarter GDP expanded 6.7 percent from a year earlier, according to data released by the National Statistics Bureau last Friday.

The central government said the nation’s economy has kept a steady growth and demonstrated good momentum since the start of the year, paving the way for the achievement of this year’s economic targets.

If that is the case, are outsiders overly concerned about China’s slowdown?

Even before the release of the latest GDP data, there have been signs that China’s economic growth is stabilizing.

On July 8 Chinese President Xi Jinping said in a meeting with various experts that the country’s economic growth is in line with Beijing’s expectations.

Generally speaking, second-quarter GDP continued the steady growth momentum in the first quarter thanks to resilient domestic demand. Consumer price remains stable, and various reforms have made good progress. The new economy grew at a fast clip, creating more than seven million jobs.

The economy has followed an “L-shaped” growth pattern with slight ups and downs.

In the second half, the government is continuing to adopt pro-growth measures to offset downside pressure.

Public spending and infrastructure investment will play a key role. Government debt, specific debts by policy banks and public-private partnerships are all possible policy tools.

Also, the nation has added research and development (R&D) spending into its calculations for GDP for the first time.

R&D spending contributed to 0.02 percentage point to economic growth in the first half. This will have a profound impact in encouraging innovation and R&D spending in the years to come.

Frankly speaking, however, the second-quarter macro growth condition was really worrying, given the complex global economic environment and the various challenges at home.

The nation’s manufacturing PMI eased 0.1 percentage point to 50.0 percent in June. It seems the manufacturing sector has stabilized while running out of steam. Smaller firms have reported the sharpest drop of 1.2 percentage points to 47.4.

In the meantime, social fixed-assets investment rose 3.9 percent in the first five months of this year, 6.2 percentage points lower than the growth rate a year earlier.

Social investment accounted for 62 percent of the nation’s total fixed-assets investment, down 3.4 percentage points from the year before.

Falling private investment will hurt economic growth potential. Accumulating property bubble and volatile financial markets have added more uncertainties.

I believe China’s economic growth is unlikely to hit bottom before the first quarter of 2017, and there won’t be any quick rebound before the end of this year.

Beijing may further ease monetary policy to stimulate growth. The central bank may cut the reserve requirement ratio one more time for rest of this year, while holding back further interest rate cuts amid mounting downward pressure on the renminbi.

Housing sales may cool off in the second half of this year as the central government tries to tame skyrocketing land prices. That may exert a drag on economic growth.

The authorities are likely to ramp up public spending to offset dropping private investment and the cooling property sector.

The broader money supply M2 expanded 11.8 percent as of June from a year earlier, while M1, which includes bank deposits and currency in circulation, rose 24.6 percent, the biggest increase in six years.

The great divergence between M1 and M2 indicates massive money is sitting in corporates’ bank accounts as they remain pessimistic about the economic outlook.

China’s economy is still looking for the bottom.

I believe the nation could achieve its growth target of over 6.5 percent this year.

However, it would rely on government spending and infrastructure investment.

Also, the central government should step up policy support for private firms, such as tax breaks, cheaper funding and better access to monopoly industries.

This article appeared in the Hong Kong Economic Journal on July 18.

Translation by Julie Zhu

[Chinese version 中文版]

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Senior investment banker

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