China GDP growth slowed further in the year to June, slipping to 7.5% from 7.7% in the year to March. This was in line with our and the markets expectation, and with the trend slowdown in growth of some of the key activity indicators we have seen in recent months.
The quarterly rate of GDP growth came in at 1.7% in the June quarter, only marginally stronger than the weak 1.6% March quarter result. We don’t put too much weight on these numbers.
Looking at the key activity data, growth in industrial production slowed further, falling to 8.9% in the year to June, down from 9.2% in May. This reflects weak external demand and no doubt also the recent tightening in monetary conditions, including the stronger RMB.
Fixed Asset Investment continued its decline since the start of the year with year-to-date growth slipping to 20.1% in June, down from 20.4% in May. Real estate and infrastructure investment are holding up reflecting the strong housing market and government program's respectively, but manufacturing investment remains weak reflecting excess capacity and tighter credit conditions.
The only bright piece of news in the data was retail sales. Monthly growth in nominal sales has been on an improving trend since the crackdown on "lavish and wasteful" government spending earlier in the year. However, part of that improvement needs to be attributed to price rises. But it also underlines that, at least thus far in the slowdown, the labour market has been holding up well and supporting consumption. The performance of the labour market will be critical in the period ahead in terms of just how much of a slowdown the authorities are willing to tolerate.
That's the key question going forward. Up until now, the authorities have continued to choose reform over stimulus or quality of growth over quantity. That was made very clear with the June credit crunch and the residual tightening in monetary conditions which will most likely lead to tighter credit conditions in the second half of the year. Indeed the annual rate of growth in both loans and the money supply weakened in June, the latter falling to 14.0%, down from the 15.8% recorded in May. The official target for the year is 13.0%.
Tighter credit conditions, soft external demand, currency appreciation and excess capacity in the manufacturing sector are all growth-negative factors in the period ahead. However, if consumption holds up and exports pick up later in the year as growth in America strengthens and Europe stabilises, my 7.6% annual average forecast might still be achievable. That said, I freely acknowledge the risk to that forecast is biased to the downside. I'm taking comfort from the fact the authorities will likely step in to support growth if it weakens too much further, especially if it threatens jobs growth. I'd expect that stimulus to be of a fiscal rather than a monetary nature.
In the meantime expect more reform noise and hopefully action, especially with respect to capital account and interest and exchange rate liberalisation. Environmental policies will also be high on the agenda. How well those reforms are implemented will be critical. The recent crackdown on shadow banking was well-intentioned but heavy-handed.
Finally, remember this: our China story has long been one of a structural slowdown over time. In our last strategic asset allocation review we assumed a 10-year average growth forecast for China of 7%. That implied a range of 6-8%. The upside of lower growth in China is more sustainable growth, assuming a timely and effective reform program.