Chinese growth once again surpassed expectations in the second quarter, growing 6.9% year-on-year (y/y), unchanged from the first quarter. This should ease fears over the ongoing credit tightening in China, though we still expect a growth impact to come through in the second half of this year.
Manufacturing growth accelerates
A key contributor to the growth surprise was much stronger-than-expected industrial production, at 7.6%, up from 6.5% y/y the previous month. Breaking the data down shows an acceleration within broad manufacturing, and within some but not all raw materials sectors.
So this does not necessarily seem to be a growth performance entirely reliant on “Old China”. This raises the upside risks to our forecast for 2017 of 6.6% growth; while we still expect real estate and infrastructure to slow, it seems increasingly likely that manufacturing may be able to compensate.
Positive surprise from retail sales and investment
Other high frequency data has also surprised to the upside this month, with both retail sales and fixed asset investment beating expectations. Investment saw a broad based acceleration with manufacturing investment continuing last month’s pick up, but real estate and infrastructure also turning around after slowing notably in May.
Arguably there are base effects at work but it is hard not to see this as a sign of resilience. Within retail sales there was a large jump in particular for communication appliances (20.1% y/y from 5.1% previously), with most other subcomponents weakening. Jumps in this series tend to be short lived so it will be interesting to see if broader retail sales can maintain momentum in the months ahead.
Slowdown likely in H2 as credit tightens
We are likely to revise up our growth forecast for China when we update our numbers next month, but we maintain our expectations for a slowdown in the second half of the year. Credit tightening continues, and generally impacts the economy with a lag; we as yet see no reason that this should not be true this year.
The strong Q2 growth performance should give the authorities the confidence to maintain their tighter stance for the time being. Indeed, the Financial Work Conference which concluded last week focused on deepening financial reforms and containing financial risks, with priority to be given to reduce leverage at state owned enterprises.
Softer global trade could weigh on manufacturing
It also seems likely that global trade will soften in the months ahead, at least in value terms, as the impact of the commodity price recovery fades. Export growth has a good relationship with manufacturing in China, so any slowdown would challenge a key support of China’s robust growth.
The article above was first published by Schroders on 17th July 2017.