Chinese Economic Update: September 2016

No surprises in the latest data, weaker real estate sector leads to a softening in the growth profile

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Key points:

  • There were no surprises in the latest Chinese data – with most indicators tracking broadly sideways. As such, there is no change to our expectations for the economy as a whole – with our forecasts for economic growth unchanged at 6.6% in 2016 and 6.5% in 2017 (albeit with risks weighted to the downside for the latter).
  • The anticipated slowing trend for China’s economy from the second half of 2016 is largely driven by weaker activity in the construction sector. While fixed asset investment was stronger in August – rebounding to 8.1% yoy growth (from a particularly low 3.9% yoy in July) – investment in real estate remained subdued (at 3.6% yoy on a three month moving average basis). This has contributed to the slowdown in residential construction starts – down to 6.7% yoy (3mma) in August, compared with the recent cycle peak of 20% in April.
  • Growth in industrial production ticked up in August to 6.3% yoy (from 6.0% in July) – albeit the trend has remained relatively stable across the past six months.
  • China’s trade surplus was marginally wider in August – at US$52 billion, as both exports and imports rose month-on-month. Import values rose by 1.5% yoy in August – the first increase since October 2014 – in line with commodity price trends.
  • There was stronger growth in retail sales in August – with sales volume growth pushing back over 10% yoy. Consumer confidence has improved in recent months, pulling away from a slightly negative reading in May.
  • Headline inflation was significantly lower – at 1.3% yoy – on weaker price trends for pork, fresh vegetables and fresh fruit. Producer price trends continue to become less negative (year-on-year) – with prices up around 1.6% since the start of the year.
  • The most recent credit data from July shows a slowing trend, in stark contrast to the credit binge in Q1. Our expectations around monetary policy remain unchanged – with no further cuts to the benchmark one year lending rate in 2016. Any policy easing may be driven by cuts to the Required Reserve Ratio – particularly given an apparent increase in capital outflows more recently.

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