Below trend growth to continue
China’s share market emerges as a key economic risk in early 2015, as industry remains weak.
More detailed national accounts data showed that the key driver of economic growth in Q1 was the finance sector – which accounted for over a third of the growth in services – which is likely due to the surge in share markets. New investors have been pouring into the market, raising legitimate concerns around the sustainability of these recent trends.
Our economic forecasts are unchanged (7.1% in 2015, 6.9% in 2016) but we highlight that a major share market correction could pose significant risks for China’s growth – particularly the transition towards a consumption based economy.
China’s industrial production remained weak in April – although marginally stronger than March, edging up to 5.9% yoy (from a six year low of 5.6% previously).
Fixed asset investment continued its slowing trend in April – down to 9.4% yoy (from 13.2% in March) – dragged lower by manufacturing and real estate. This was the slowest rate of growth for investment since December 2001.
After falling sharply in March, China’s trade surplus rebounded in April – rising back to US$34.1 billion (compared with US$3.1 billion in March). This reflected a larger fall in imports (-16% yoy) than exports (-6.4% yoy).
The People’s Bank of China (PBoC) cut interest rates for the third time in six months in May – bringing the one year lending rate to 5.1%. PBoC measures to purchase local government bonds only superficially resembles quantitative easing – which remains unnecessary due to the still high level of the Reserve Requirement Ratio – and is instead seeking to underwrite the debt swap program.
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