Chinese GDP growth was better than expected in the second quarter, but appears overly reliant on one engine of growth: fiscal stimulus.
Chinese GDP growth was unchanged in the second quarter of the year, at 6.7% year-on-year, though it accelerated in quarter-on-quarter terms to 1.8%, from 1.2% previously.
The reading, along with other activity data for June, surprised us and the market, and would suggest that stimulus efforts have successfully supported growth.
A sector breakdown of the data shows acceleration coming through the primary and secondary industries, or “old” China, with the tertiary sector slowing marginally. This is counter to the narrative of a China transitioning to a new growth model and suggests that growth and stability for now trump the need to reform the economy.
We would also note, however, that this time last year saw an outsize contribution from the services sector thanks to the equity market boom, so some payback was inevitable. Growth in services also continues to surpass that in manufacturing and other areas.
Looking at the higher frequency data released alongside the GDP print today, it seems that it is a mix of infrastructure and property spending that has supported activity in much of the rest of the economy.
The linkages would appear to be accelerating infrastructure investment driving a bounce in industrial production, while strong property sales have given a helping hand to retail sales, which also rebounded slightly in June.
We would note, however, that property investment slowed markedly (to 3.6% year-on-year from 6.5% previously) and that manufacturing investment actually contracted slightly, perhaps reflecting the crackdown on spare capacity, but also greatly diminished private sector appetite to invest. Private sector investment (60% of the total) is now growing at 0% compared to 10% in late 2015.
This points to risks and challenges for the third quarter.
The economy looks to be increasingly reliant on fiscal stimulus to keep growth going. Government debt ratios are low enough to support this for some time, but with the property sector apparently cooling, larger and larger dollops of cash, backed up by credit from an increasingly risk-laden financial sector, will be required to keep the same rate of growth.
Still no hard landing, but reliance on only one engine of growth can only increase the risks to the outlook.
The above article by Craig Botham, Emerging Markets Economist at Schroders, was first published by Schroders on 19th July 2016.