Overview:

• In line with the stable trends in China’s monthly data, economic growth was unchanged in Q2 at 6.9% yoy. Services remain the key contributor to China’s growth (increasing by an unchanged 7.7% yoy in Q2), while the secondary sector expanded by an unchanged 6.4% yoy. The stronger than expected start to the year has resulted in an upward revision to our forecasts – with GDP expected to grow by 6.7% in 2017 (the same rate as in 2016) (previously 6.5%). We continue to anticipate a gradual slowdown in growth in coming years – at 6.5% in 2018 and 6.25% in 2019.
• New credit grew strongly in Q2 – following on from a relatively modest increase in Q1 – expanding by just over 36% yoy. For the first half of the year, new credit totalled RMB 11.2 trillion, an increase of 13.9% yoy. Last week, President Xi instructed China’s SOEs (who account for the largest share of Chinese credit) to deleverage – however It is too early to tell if this will have any effect on credit issuance or GDP in the second half.
• China’s industrial production accelerated in June – rising by 7.6% yoy (up from 6.5% in May). Steel production surged to a new monthly record in June – with producers benefiting from comparatively cheap inputs (following the correction in metallurgical coal markets) and higher product prices (since mid-April).
• Growth in fixed asset investment was somewhat stronger in June – increasing by 8.6% yoy (compared with 7.9% in May). Investment in the real estate sector has remained strong – despite a range of measures intended to slow activity in the industry. On a trend basis, residential construction starts have eased a little – increasing by 13.1% yoy (3mma), down from 15.1% in May – but it is too early to suggest this will continue, given that monthly construction starts in June were at their strongest level since November 2013.
• China’s trade balance continued to widen in June – out to US$42.8 billion (from US$40.5 billion in May). Strong growth in both exports and imports has been driven in part by commodity prices, with the RBA Index of Commodity Prices rising by 23% yoy in June. The current commodity cycle has peaked – the RBA index is down around 16% since January – meaning that the growth in import values is likely to be weaker across the second half of 2017.
• Retail sales growth picked up in June – with real sales rising by 10.0% yoy (from 9.5% in May). Consumer confidence was a touch softer in May, with the index at 112 points (down from 113.4 points in April – the strongest reading in this measure since June 2007).
• There has been minimal change to Chinese monetary policy in recent weeks – with the 7 day Shibor trading in a range of around 16 basis points since the start of June. The rate has dipped back to around 2.8% – around 30 basis points tighter than the start of the year. We continue to expect a modest tightening in monetary policy in the second half of the year – with concerns around the high levels of corporate debt likely to make the PBoC cautious in its approach.

For further details, please see the attached document:

• China’s economy at a glance: July 2017 (PDF, 468kb)