China’s economic growth was stable in Q2, but can services maintain momentum post equity correction?

An influx of new investors and a sharp increase in margin finance contributed to the surge in equity prices since late 2014. Following a correction starting in mid-June, China’s government implemented a range of policy measures to curb the falls – raising some concerns around the Government’s broader appetite for reform.

Second quarter national accounts data showed China’s economy expanded by 7.0% yoy, unchanged from the March quarter – although this doesn’t correspond with official quarterly growth rates. Services were the key driver of growth, but reflecting the impact of the equity boom on Q1 GDP, there are questions as to the sustainability of this growth. Our forecasts are unchanged (7.1% in 2015; 6.9% in 2016).

Although it has remained weak on a historical basis, China’s industrial output strengthened again in June – increasing by 6.8% yoy (compared with 6.1% in May).

China’s fixed asset investment has continued to edge away from a thirteen year low in April, with growth at 11.4% yoy in June (compared with a 10% increase in May). In part this may reflect the impact of policy measures across the first half of the year.

China’s latest trade data showed a slight narrowing in the overall surplus – down to US$46.5 billion (from US$59.5 billion in May). This contraction was driven by a month-on-month strengthening in imports (albeit imports remain well below levels from 2014).

In late June, the People’s Bank of China (PBoC) cut interest rates – in part a response to the share market plunge. The benchmark one-year lending rate was cut to 4.85% – a record low – along with targeted (RRR) cuts. Further policy easing is expected across the second half of this year.

For further details, please see the attached document.

China’s economy at a glance – 15 July 2015 (PDF, 907KB)