China: Growth to remain steady - HSBC

The strength of the Chinese economy surprised many on the upside in H1 2017 as economic growth averaged 6.9% in H1 2017, up from 6.7% in H1 2016.

Key Quotes

“Leading indicators suggest that growth momentum will likely remain robust in Q3, even though the housing markets may continue to slow gradually in the coming months.” 

“Unlike in the past few years when growth was supported by infrastructure investment and the housing market upturn, the recovery this time around is much more broad-based. Crucially, it is driven by the private sector, which accounts for over 70% of economic activity on a variety of metrics. After almost six years of steady decline, private business investment grew by 6.3% YTD y-o-y in August up from 2.1% over the same period last year. Industrial profits, business confidence and the capacity utilisation rate have also shown notable improvements. Aside from the pick-up in external and domestic demand, the private sector has also benefitted from a prolonged period of structural adjustments since 2008. In contrast to its SOE counterparts, the private sector has de-leveraged significantly over the past nine years. Recently it has also moved up the value chain, by moving away from low value-add, labour intensive goods into medium and high value added sectors, such as electronics and machinery. The structural nature of the recovery should help ensure its sustainability.” 

“Meanwhile, more signs have emerged suggesting the housing market may be cooling due to a number of constraints on activity, ranging from higher interest rates on mortgages to increased land supply. Housing sales (measured by floor area sold) fell to 12.7% YTD y-o-y in August compared with growth of 26.4% over the same period last year. The slowdown in sales is likely to weigh on investment over the coming months. Given lower levels of inventory and stronger performance in Tier 3 and 4 cities, the slowdown should be more much moderate than in 2015.” 

“The much anticipated 19th Party Congress will take place on 18 October. Given the importance of the private sector growth recovery, we expect policy makers to try their best to sustain this positive trend. Meanwhile, a stronger growth backdrop should also give them a window of opportunity to accelerate reforms of the state-owned enterprises and de-risk the financial system.”