China: Old economy at the heart of Q2 growth - NAB

Gerard Burg, Senior Economist at NAB, notes that the China’s economy grew by 6.7% yoy in Q2 – unchanged from Q1.

Key Quotes

“Although the services (tertiary) sector remained the main contributor to growth in Q2, its contribution was smaller than in Q1, while the secondary sector (manufacturing and construction) picked up.

Given the likely easing trend in construction in the second half – with weaker housing starts and investment in recent months – we believe that the quarterly growth momentum can’t be maintained at current levels. As a result, we are shaving our growth forecast for 2016 to 6.6% (from 6.7% previously). Our forecast for 2017 is currently unchanged at 6.5% – however risks are weighted to the downside.

There was a slight uptick in industrial production in June, with growth at 6.2% yoy (compared with 6.0% in May). This outcome was above market expectations. Heavy industry (such as steel and cement) recorded modest growth, compared with declines in 2015.

China’s fixed asset investment growth softened marginally in June – down to 7.4% yoy (from 7.5% previously).

China’s trade surplus was slightly narrower in June, at US$48.1 billion (down from US$50.0 billion in May), with exports declining slightly month on month, while imports rose. Both export and import values declined in year-on-year terms, however this in part reflects price effects.

Headline inflation was modestly weaker in June (albeit stronger than levels across most of 2015), while producer prices fell less significantly than in recent months. New credit growth was weaker in the second quarter – following the credit binge in Q1.

We had previously forecast two 25 basis point rate cuts in 2016, however we feel that the likelihood of this has reduced – in part due to comparatively stronger inflation trends and the pressure further rate cuts would impose on either bank margins or deposit rates for savers. Therefore we see no further cuts in 2016.”