Momentum for growth ‘may not last’ in China

Recent indicators look good, but analysts see hurdles to a continued state-led recovery

PUBLISHED : Tuesday, 04 July, 2017, 8:33am
UPDATED : Tuesday, 04 July, 2017, 8:33am

China’s economy looks solidly on track thanks to state-led spending on infrastructure, with the first pair of indicators on second-half growth showing good prospects.

A private gauge of sentiment in the manufacturing sector, the Caixin purchasing managers’ index (PMI), rose to 50.4 from 49.6 in May, showing increased production at mainland factories. An official PMI number released last Friday also showed expansion. However, doubts are growing on whether the momentum can last, with property cooling measures starting to hurt investment and probable further tightening by the US Federal Reserve expected to force the People’s Bank of China to be more hawkish.

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“China’s GDP growth may not slide, but its underlying power to increase the economy has faded,” Tao Dong of Credit Suisse Private Banking wrote in a note. “The so-called ‘new economic cycle’ is nothing but policy noise hyped by the increase of lending.”

Tao wrote that private investors were still facing an unfriendly business environment and reluctant to spend, leaving the state to undertake the job of bolstering growth.

China’s headline gross domestic product growth hit 6.9 per cent in the first quarter of this year, a level that is higher than the government’s full-year growth target of 6.5 per cent. Meanwhile, Beijing has also managed to keep the yuan exchange rate stable against the dollar, and prevented its foreign exchange stockpile from shrinking further.

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Beijing has also increased its monitoring of the financial sector via the China Banking Regulatory Commission, under its new chairman Guo Shuqing. Xiang Junbo, the former chairman of the country’s insurance regulator, has been put under investigation for possible corruption deals.

Frederic Neumann, co-head of Asia economic research at HSBC, said policymakers were mindful of the challenges of reining in financial leverage to root out risks without blocking credit inflows, which could lead to a sharp deceleration of growth.

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“China’s economy is likely to cool from its blistering pace over the first half of the year. Financial tightening will at the margin exert some downward pressure on private investment, and tighter restrictions on home purchases in many cities could restrain housing construction,” Neumann said.

Real estate investment is expected to slow down as a result of tighter credit, according to Zhao Yang, chief China economist at Nomura in Hong Kong.

Property investment grew by 8.8 per cent in the first five months of this year, in spite of restrictions on purchases in more than 50 cities as Chinese investors, barred from remitting funds abroad, chased real estate as a safe investment option.

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Liu Ligang, chief China economist at Citi, said infrastructure spending would remain a key engine for growth, and that local governments were eager to expand spending.

But the rising cost of financing, as a result of tightened monetary and credit supply, would hurt the growth of private investment, which had “rebounded from last year’s low level but still fallen behind the level two years ago”, Liu said.

Larry Hu, a China economist at Macquarie Group, said Beijing was engaged in a tug of war between economic performance and liquidity in the market.

“Interestingly, the reason that policymakers could focus more on financial regulation than on stimulus is because of the resilient economic growth,” Hu said. “Looking ahead, we are expecting a mix of deteriorating fundamentals and improved liquidity,” he added.