China: Growth momentum remains high in Q2
July 17, 2017
Growth continues to surprise on the upside; the economy expanded at the same pace as in the previous quarter in Q2 following a dubious start to the quarter. While there are some concerns about the quality of growth, the strong performance in H1 will provide policy makers with room to implement economic reforms in the second half of the year as growth will comfortably meet the 6.7% target for this year. GDP grew 6.9% annually in Q2, a notch above the 6.8% that market analysts had expected.
Although the National Bureau of Statistics (NBS) does not provide a breakdown of GDP by expenditure, additional data suggest that low inflation is supporting private consumption, with nominal retail sales accelerating slightly over the previous quarter. Moreover, strong external demand is pushing exports of merchandise trade up, which, coupled with resilient domestic demand, is translating into improved dynamics in the manufacturing sector. On the downside, healthy activity at home is buttressing imports, weighing on the contribution from the external sector to overall growth. Policy tightening to curb an overheating property market in some cities is dragging on overall investment. Bold policy support, however, is shoring up infrastructure investment.
Sequential data show that GDP in Q2 adjusted for seasonal factors increased 1.7%, up from the 1.3% expansion in Q1. Overall nominal GDP grew 11.8% annually in Q1, which was above the 9.6% increase in Q4 and was mainly the result of higher industrial prices.
Risks of a sharp slowdown due to increasing protectionism and a downturn in the property market failed to materialize in the first half of the year, allowing the Chinese economy to deliver surprisingly strong growth rates. Against this backdrop, authorities have the backing they need to implement economic reforms, reduce overcapacity in certain sectors and deleverage the financial sector in the second half of the year. In this regard, top authorities gathered on 14–15 July to discuss financial regulation in the Fifth National Finance Work Conference. President Xi Jinping highlighted that the financial sector has to serve the real economy and that financial stability is key for the government. In order to implement Xi’s agenda, authorities strengthened the role of the People’s Bank of China for macro-prudential policy and system risk prevention and created a committee to co-ordinate financial policies and regulations. Xi pledged to further open up the financial sector and capital account convertibility, while promoting the internationalization of the yuan. Tighter regulation has the potential to hit economic growth in the mid- and long-term, but it will certainly help the country to find a more sustainable growth trajectory from a somewhat longer term perspective.