China will require a new engine for growth in H2 2016 and 2017 - NAB

Gerard Burg, Senior Economist at NAB, suggests that a rebound in real estate investment, new construction activity and industrial demand for related products – such as steel and cement – helped to underpin China’s economic growth in the first half of 2016.

Key Quotes

“This rebound is fading, with investment and new construction starts slowing, along with weaker trends for housing sales (in both value and floor space terms). The latest data doesn’t change our forecasts for economic growth – 6.6% in 2016 and 6.5% in 2017 (with risks weighted to the downside for the latter) – with this slowing trend in line with our expectations.

While most indicators were relatively stable in July, there was a marked slowdown in China’s fixed asset investment – with growth down to 3.9% yoy (from 7.4% in June) – compared with double digit growth across the first four months of the year. State-owned enterprises (SOEs) have been driving fixed asset investment in recent months – counter to attempts to reform the sector and address widespread industrial overcapacity. In July, fixed asset investment by SOEs rose by 14% yoy (down from 24% in June), while non-state firm investment contracted by 1.0% yoy.

Growth in China’s industrial production eased slightly in July – down to 6.0% yoy (compared with 6.2% in June). Construction related industries have shown some weakening trends – with crude steel output in July around 5% lower than May, and growth in cement production slowing. In contrast, growth in electricity output accelerated and automotive production rose by 25% yoy.

China’s trade surplus was a little wider in July, at US$52.3 billion (compared with US$47.9 billion previously), as exports rose month-on-month while imports tracked sideways. In year-on-year terms, both exports and imports contracted – a trend evident since early 2015 that largely reflects falling prices.

Trends for China’s retail sales were a little softer in July – with growth easing to 10.2% yoy (from 10.6% in June). Retail price inflation has softened in recent months – down to just 0.3% yoy in both May and June (compared with 0.9% in February) – however it was likely to be strong enough to push real retail sales growth back below 10% yoy in July (our estimate is 9.9%).

Headline inflation eased marginally in July, with the Consumer Price Index growing by 1.8% yoy – the slowest rate since December 2015. This was despite widespread flooding in southern China that had been expected to impact on the prices of key food products (including pork).

Credit data was unavailable at the time of writing. As we noted last month, we expect the People’s Bank of China to keep the benchmark one year lending rate unchanged for the remainder of 2016, although we see the potential for further cuts to the Required Reserve Ratio over this period.”