Goodbye, “Made in China”
Executive Summary
Premier Li Keqiang says he will defend the “bottom line” for China’s economic growth. But what is that? Some suggest it’s the 7% GDP growth target; others that it’s 7.5%. Per the second view, 7.5% was achieved in Q2, and is already the bottom line. A third view is that Li has acknowledged a wide range of new constraints facing the economy, will keep expectations between these limits, and is unlikely to take bold or surprise actions.
We’re unlikely to see any surprise policy move before a major Party policy meeting planned for September or October. But stabilizing actions could still take place, what with indicators continuing to show weakening signs.
Commodity exports fell -3.1% y/y in June, effectively ending the decades-long miracle of “Made in China.”
Fixed asset investment rose 20.1% in the year to June, down 0.1 pps from May, and 0.6 pps from Q1. Many provinces have boldly pursued rapid investment expansion this year, but now face more constraints in financing expansion. FAI growth may slow further. Industrial output rose 9.3% in the year to June, down 0.1 pps from May, or 0.2 pps from Q1. The process of de-stocking and downsizing in Chinese industry continues, accompanied by PPI deflation
Retail sales of consumer goods rose 11.8% y/y in Q2, up 1.1 pps from Q1. But June’s rate (11.7%) was lower than May’s (12.1%).
Growth downside risks have risen, mainly due to fast deterioration in export growth, and increased constraints to domestic investment growth. There is a medium probability that the slowdown will persist, should the government remain relatively inactive. The root cause of PPI deflation is de-stocking and downsizing by many of Chinese industrial firms, particularly in heavy industry, such as steel making and coal mining. That process is likely to continue.
There are many interpretations of the June money market liquidity crunch. We blame changing behavior in Chinese bank borrowing, given partial interest rate liberalization of recent years. Banks’ greater reliance on short-term funds via the money market has made them particularly vulnerable to money supply shocks. That’s why it’s right for the Central Bank to act more cautiously. Yet one of consequence of caution is that interest rates are remarkably high today – and that could delay economic recovery.
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