The worst may be behind us, but no room for policy complacency
The latest GDP numbers from China show that the bulk of the cyclical slowdown in the economy may be in the rear-view mirror, as the effects of the deleveraging policy seen last year fade away. However, we should not take too much comfort in any improvement seen in this latest dataset. Compared to still-vulnerable economic fundamentals, we think there is more risk of stimulus underwhelming on the back of such short rebound.
Industrial production has been volatile in recent months but had a strong finish to the quarter at 6.3 per cent year on year. Investment also picked up somewhat to 6.3 per cent year on year, although remains subdued compared to historical levels. Much of this has been driven by ‘upstream’ industries, such as equipment manufacturers.
The sustainability of this upstream exuberance is now in question given as authorities are marginally tightening policies in the property sector and the limited improvement in private-owned enterprise financing. Moreover, infrastructure spending is yet to pick up at all, at 3.9 per cent year on year.
Similar to industrial production, retail sales surged to 9.8 per cent year on year, the highest rate since the first quarter of 2018. The number is also impressive in real or inflation-adjusted terms, at 6.7 per cent year on year.
Stronger nominal growth, softer domestic demand
Second quarter real GDP growth produced a slight upside surprise at 6.2 per cent year on year, and 1.6 per cent quarter on quarter. Perhaps more importantly, nominal growth soared after a post-2015 first quarter low to 11.3 per cent quarter on quarter annualised – the fastest since the first quarter of 2017.
Source: China National Bureau of Statistics, Haver Analytics, July 2019
However, it is concerning that over twenty per cent of year-to-date growth has been driven by net exports, not domestic demand.
Indeed, imports were again a meaningful downside surprise in June, ticking down for a second month, although still above the first quarter lows. Imports from the US did fall following the latest tariff escalation but fell far less than we saw at the end of last year and the start of 2019. The relatively small size of trade with the US versus the rest of the world means it is essentially a blip in the overall picture. Exports still show marginal growth, leaving the overall trade balance essentially maintaining the post-2016 highs.
Credit data still moderately expansionary
Total social financing was a solid upside surprise, comfortably above any month in 2018, and only eclipsed by January and March this year. The credit ‘impulse’, therefore, keeps moving higher.