Weak Investment May Pressure Growth
GDP growth continues flat, its 6.9% y/y rise in H1 up only 0.1 pps from Q4 2016. Industrial output was up 6.9% y/y, climbing by 0.8 pps, and fixed asset investment was up 8.6%. But in real terms, fixed asset investment growth was just 3.8% y/y, down 5 pps from last year. We expect H2 growth to experience downward pressure. National household consumption spending rose 6.1% y/y, down 0.5 pps from H1 2016, to its lowest level since this measure was created 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, leaving 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, similar to PPI. We expect prices to be low in H2.
The main financial indicators in H1 point mostly to persistent falling growth. M2 was up 9.4% y/y at the end of June, down 1.9 pps from the end of 2016, reaching a historical low. 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 fiscal expansion. Both the yuan and capital flows have stabilized, and have turned positive for the latter.
At a “Belt and Road Forum” in Beijing May 15th, President Jinping Xi advocated globalization, and announced the addition of $12.4 billion into the China-bankrolled project, linking more than 60 countries in Eurasia. This exporting of excessive capital is partially a consequence of China’s excessive domestic savings rate, of around 50%. This project will benefit both China and the rest of the world, by providing a more integrated global market. The China Foreign Exchange Trade System trading platform, overseen by the Central Bank, on May 26th announced the introduction of a "counter-cyclical factor" into the way it calculates the yuan's daily reference rate. We believe this change will lead to a more fundamentals-based exchange rate. Meanwhile, the FX reserve seems to be stabilizing. China’s top leaders have gathered every five years since 1997 for a National Financial Work Conference. During this year’s July 16th meeting, financial risk was the main topic. The most concrete action taken was the creation of a cabinet-level committee to coordinate financial oversight. We consider China’s financial or debt risk containable. High debt, in contrast to other countries, is mostly concentrated in the corporate sector, especially in state-owned enterprises, and the Chinese government has a large direct say in SOE debt restructuring. China’s relatively high economic growth also promises to contain its debt over the medium term.
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