Financial Risk Likely to Be Contained
GDP rose 6.9% y/y in H1, up only 0.1 pps from Q4 2016. Industrial output rose 6.9% y/y, up 0.8 pps, and fixed asset investment rose 8.6%. But fixed asset investment’s real growth rate was just 3.8% y/y, down 5 pps from last year. Negatively affected by weak investment growth, we expect H2 growth to experience downward pressure. National household consumption spending rose 6.1% y/y, down 0.5 pps from H1 2016, reaching its lowest level since the creation of this measure in 2014. Retail sales of consumption goods rose 9.1% y/y in real terms, down 0.6 pps. Exports and imports are recovering, rising 8.5% and 18.9% y/y respectively, though both are still lower than in 2013 and 2014, and have much room for recovery.
The ex-factory price index of industrial goods peaked in February, with a growth rate of 7.8% y/y, and then declined, to 5.5% y/y in June. Similarly, PPI topped out in March, with growth of 10% y/y, falling to 7.3% y/y in June. We expect prices to be low in H2, based on the current non-loosening monetary policy.
In H1, negatively affected by financial deleveraging policies, the main financial indicators point mostly to persistent falling growth. At the end of June, M2 rose 9.4% y/y, down 1.9 pps from the end of 2016, reaching a historical low. M1 rose 15% y/y, down dramatically from recent high levels, and down 6.4 pps from the end of 2016.
National government revenue and expenditure rose 9.8% and 15.8% y/y respectively, generating a fiscal deficit of 918 billion CNY, 2.5 times that of H1 2016, constraining further fiscal expansion.
China’s top leaders have gathered every five years since 1997 for a National Financial Work Conference. On July 16th, during this meeting, financial risk was the main topic. The most concrete decision to emerge from the meeting so far has been President Xi Jinping’s announcement of the creation of a cabinet-level committee to coordinate financial oversight. We consider China’s financial or debt risk containable. Compared with the United States before the 2008 financial crisis, the Chinese government has at least recognized its debt risk. High debt, in contrast to other countries, mostly concentrates on the corporate sector – on state-owned enterprises in particular. The Chinese government has a large direct say in SOE debt restructuring. The centralization of financial oversight agencies can help avoid regulators’ coordination failure, and regulatory capture. China’s relative high economic growth also promises to contain its debt over the medium term.
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