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ECONOMY: Monthly Economy Report
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Monthly Economy Report

By Andrew Smith

11Over the last month the important data coming out of the world's second largest economy has been a mixed bag. Looking at the overall picture, i.e. pure GDP growth in the second quarter of 2016, the persistent pattern of a slowdown seems to have subsided. According to the latest figures from the National Bureau of Statistics (NBS), Gross Domestic Product expanded by 6.7 percent in the three months till June compared to a year earlier. The rate was steady from the previous quarter and above expectations of 6.6 percent. Analysts said the data showed the world's second-biggest economy was most likely stabilising. There were also signs of stability and strength in other sectors. Industrial output grew by 6.2% compared to forecasts for 5.9% amid concerns about overcapacity, while retail sales rose by 10.6% beating forecasts for 10% growth.

20150528071833900Stronger GDP growth in particular will be considered a sign of success on part of Chinese policymakers. Speaking about the general state of the economy, Chinese premier Li Keqiang said this week that conditions are "basically stable", but that it was "not easy" to achieve Q1's 6.7 percent growth rate and that the economy would show "continued steady development". The government's headline target for annual growth this year is between 6.5 and 7 percent. With expansion in the first quarter of 6.7 percent as well it is looking more likely that in the absence of a major economic shock in the second half of the year, the all-important target will be met.

The Q2 GDP figures indicate China's economy is being kept stable through policy support, Daniel Martin from Capital Economics said. "While China is almost certainly expanding at a slower rate than its GDP data suggests, rapid state sector investment does appear to have kept growth broadly stable last quarter. Growth is more likely to pick up over coming months than slow down further, but a lasting turnaround is not on the cards".

It will of course take more than just steady GDP growth to reassure financial analysts around the world that the Chinese economy is back on the mend, but one major institution has been very vocal about its renewed optimism and bullishness on China. Last week American banking and investment giant Wells Fargo issued a statement in which they said that "It appears as though the Chinese economy is stabilising. High-level disaggregation of the GDP data into industry sectors offers some clues into the current state of the Chinese economy. Although the year-over-year growth rate in the "tertiary" sector (i.e., the service sector) edged down to 7.5 percent in Q2 from 7.6 percent in Q1, growth in the "secondary" sector, which combines industrial and construction sectors, strengthened to 6.1 percent from 5.8 percent".

e01On the flip side though, the report also pointed out that "Although the Chinese economy seems to have achieved a "soft landing," which stands in marked contrast to some of the worst market fears last autumn, a return to double-digit rates of economic growth is just not on the cards… We remain concerned about the long-run outlook for the Chinese economy. Although we do not think it will collapse anytime soon, we believe that it will continue to decelerate in coming years".

Given the way things are going right now we can probably expect to see more stimulating measures over the course of the year. One of the significant things we are seeing at the moment is the state having to step in in order to compensate for the unwillingness of the private sector to invest. Data showed first half fixed asset investment grew by 9 percent from a year ago, but private sector fixed-asset investment grew just 2.8 percent in the same period, down from 3.9 percent growth in the first five months, indicating headwinds from slowing exports and macroeconomic jitters.

IHS Global Insight's China economist Brian Jackson said the numbers will fuel doubts over the quality of Chinese data as well as the nature of economic growth in the country. "The first misgiving reflects concerns that the government is squeezing as much growth as plausible from relatively opaque sectors via accounting techniques," he wrote in a note. "The second misgiving reflects concern that if the data is wholly accurate, then it implies a deepening shift towards state-led growth in both the secondary and tertiary sectors, which raises major doubts about the long term productivity and thus sustainability of current economic activity," Jackson added.

ni2996On the whole the economy seemed to be holding up pretty well though, with growth evenly spread between various sectors, said head of emerging market economics at JP Morgan, Jahangir Aziz. "We've also seen in the first two quarters of this year reasonable amount of restructuring that is taking place in industries with excess capacity such as cement, iron ore and coal," Aziz told CNBC.

The key aspect of Chinese economy to watch closely in the second half of this year is property. Housing price rises across the country slowed in June for the second month running, which will add to fears that a construction-led rebound in the economy is simply not sustainable in the long run. The property market has of course been one of the major factors behind the world's second-largest economy and a solid recovery in home prices and sales gave a stronger-than-expected boost to activity in the first half of the year. However, slowing price growth in smaller cities and cooling property investment is showing that recovery may already be fading, which increases the risk of weaker economic growth in coming months. According to an official survey, residential real estate prices in China's top 70 major cities rose by 7.3 percent in June compared to a year earlier, accelerating from a 6.9 percent rise in May.

It has to be noted that while there was a general slowdown in price growth, some of the biggest cities showed staggering gains on a yearly basis, with prices in the southern boomtown of Shenzhen rising up to 46.7 percent and in Shanghai up to 27.7 percent. Having said that, gains continued to fall on a monthly basis as local governments decided to tighten policies amidst fears of a housing price bubble. The monthly rise slowed slightly to 0.8 percent in June, easing from 0.9 percent in May, according to a Reuters calculation based on data issued by the National Bureau of Statistics. "We continue to expect the property rebound to subside and property investment growth to fall in the second half of the year," economists at Nomura said in a note, predicting sales would stabilize and a large glut of unsold homes would keep pressure on prices in some areas.


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