Thursday, July 17, 2014

China growth better than expected

The recent stabilisation of China activity data resulted in a better-than-expected GDP growth result for the June quarter.  The economy grew 2.0% over the quarter, up from 1.4% q/q in March.  Annual growth came in at 7.5%, better than market expectations of 7.4% and much better than my clearly overly pessimistic forecast of 7.2%.

Industrial production came in at 9.2% for the year to June, up from 8.8% in May.  Growth in Fixed Asset Investment increased in year-to-date terms from 17.2% in May to 17.3% in June.   That’s on the back of an acceleration of infrastructure and a recovery in manufacturing investment offsetting slowing real estate investment.  Infrastructure spending is likely to gather further momentum as the Government continues to fast-track rail investment.

Stronger external demand and the recent weakness in the exchange rate assisted stronger net exports while the recent series of policy “fine-tuning” measures including fiscal stimulus and the targeted easing in financial conditions supported domestic demand.  It’s no coincidence that growth in the money supply (M2) and new loans were stronger than expected in June.

The trajectory of the quarterly improvement and the factors behind it suggest continued solid growth into the next quarter at least.  At this point we think annual growth will continue at the current pace in the second half of the year with annual average calendar growth likely to come in either on or not far off the official target of 7.5%.  Residential property remains the key growth risk but as I’ve said before there is no shortage of measures the Government can adopt to stem that decline.