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China¡¯s Ship Steadies, As Second Quarter Economic Growth Maintains Steady at 7%
   2015-07-20 10:46:19    CRIENGLISH.com      Web Editor: Liu

By Zhao Yang and Einar Tagen

The news, coupled with a host of other more positive numbers in exports and imports, disposable income, real estate, infrastructure investment, money growth and industrial output, is a welcome respite from the recent stock market woes and economic lethargy. It will also give Premier Li more traction as he continues the government¡¯s continuing economic reform and restructuring program, aimed at avoiding the ¡°middle income trap¡±. 

7% growth beats analyst¡¯s expectations as other data turns more positive

The news that China¡¯s second-quarter economic growth remained steady at 7 per cent ¨C matching first quarter growth ¨C was slightly better than the analysts¡¯ forecast of 6.9.

Other figures, released this week, show exports recovered, due to increased demand from developed economies, especially the US. In terms of imports, the numbers are deceiving, as the amount of exports was up, but due to falling commodity prices the total cost was significantly lower. This will continue to be beneficial to China as it depends on imported resources.

A stronger Yuan is also helping, but it also cuts the other way as Chinese exports and their added value go up correspondingly.

In terms of domestic numbers, the latest numbers from the PBOC show that both M2 and new Yuan credit loans are beating market expectations, as are loans to the real economy.

New bank loans were up significantly in June, as liquidity measures kicked in and companies started investing in capital projects.

The data come as the world searches for growth amongst economic uncertainties created by the EU Grexit and increased political instability in areas like Tunisia, which had been previously viewed as an ¡°Arab Spring¡± success. The number gives an endorsement to the economic groundwork China has laid earlier this year, to put a floor under the country¡¯s slowdown, with a series of measures like interest rate and bank reserve requirement cuts.

However, in light of issues with the stock market and overall business confidence, it is expected that further stimulus is on the way. Assuming the positive numbers continue, it is the first encouraging economic sign that Beijing¡¯s first quarter moves to stimulate the economy are showing results. It has been a difficult year so far. Slowing growth in trade, investment and domestic demand has been compounded by a cooling property sector, and creeping deflationary pressures. But, there seems to be an indication that China has managed a pragmatic tacking maneuver, in the face of global and domestic headwinds. Although it is too early to call it a success, it is the first glimmer of light in some time.

China battles domestic and international economic headwinds, as it seeks to stay on course to avoid the ¡®middle income trap¡±

In spite of a number of more broadly based fiscal moves to ease interest rates and Bank RRR requirements; Beijing managed to keep the growth of fixed-asset investments down to 11.4% from 13.5%. This is vital to Beijing¡¯s overriding goal to deleverage inefficient excess industrial capacity, as it seeks to avoid the ¡°middle income trap¡±. Last year China saw a 5% drop in its energy use per unit of GDP, but there is a long way to go before it is on par with developed nations. 

Infrastructure spending, a key component of Chinese GDP, was increased earlier this year, after having been tightened last year, to rein in spending and debt accumulation by local governments. Debt swaps arranged by the government, have allowed local governments to reduce their borrowing rates while extending their amortization, providing much needed relief to these cash strapped entities. Provinces and local councils have also been allowed to borrow funds, to complete critical and partially completed infrastructure projects.

In additional to fiscal easing moves aimed at bolstering confidence, China is using targeted infrastructure development projects, like high speed rail and highways, to maintain forward economic momentum and fill gaps left by a soft real estate sector.

In terms of China¡¯s vitally important real estate market which contributes directly and indirectly to 25% of domestic GDP, there have been a number of signs that the sector is starting to stabilize. Property prices in China¡¯s largest cities like Shenzhen and Shanghai are rising after an extended slump, but there are still concerns about when the overbuilt second and third cities will start to recover. Some are betting on an accelerated urbanization push by the goverment, but this will depend on creating economic engines, at the city level, which are capable of supporting wages which can pay for these homes.

Industrial production edged up, as did wages, which with low inflation, has boosted personal disposable income. The National Statistics Bureau described the recovery as "hard won" and noted it was driven primarily by an increase in domestic consumption, which produced 60 percent of China's economic growth in the first half, compared with 35.7 percent for capital formation and 4.3 percent from net exports.

Consumption contributed 51.2 percent to GDP growth in 2014, so the rise will be welcomed by a Government that is trying to reduce its dependence on exports, in favor of domestic demand.

The statistics bureau warned that the nascent recovery required more support to consolidate.

China stock market woes

China¡¯s volatile stock markets have also grabbed headlines this month, after the benchmark
Shanghai Composite Index fell more than 30 percent in less than four weeks, before reversing course in the past few days. However, this isn¡¯t expected to cause major damage to the broader economy given the relatively small number of Chinese stock investors and the fact that the 3 trillion lost was never there to begin with, as it represented unrealized speculative value created in the rapid run up. Year-to-date and year-on-year returns are still positive. The losers were the small investors who traded on rumors, those who leveraged their stock bets and confidence in the stock market as an investment vehicle. The winners were those who cashed out and the brokerage houses that collected transaction fees. To keep this from happening again the government will have to cracking down on the shadow banking entities which provided the leverage. Already, the government has moved to put regulations in place to protect the markets, but there will be outfalls, like Hanergy, which will need to be addressed by the Hong Kong bourse.

Take-away

As Chinese authorities manage a ¡°new normal¡± economy and navigate a course, away from a traditional model of high growth based on big investment projects, towards one where consumer demand takes prominence, there will be economic storms and headwinds, but what you should be looking at, as you measure your China strategy, is whether Beijing is sticking to its course in its goal to avoid the ¡°middle income trap¡±.

Keep in mind this a lull period in China¡¯s economic development, which will be dependent on the success of its regional economic strategy and financing mechanisms. One Belt One Road, or as I call it the Silk Web, and financing mechanisms like the AIIB, Silk Road Fund and BRICS Bank are the key to getting China¡¯s factories humming, imports and exports moving and building a larger market for Chinese goods.

Keep in mind that as China¡¯s economy changes, so will the measure of its success. Investment driven models which measure outputs are more easily quantified by GDP, but as China¡¯s economy climbs the value chain and internal consumption and service industries make up more and more of the economy, the important numbers will be more fine grained and require looking at a host of smaller numbers including disposable income, value added, efficiency and market development growth. 


About the Author

Zhao Yang hosts a China Radio International business flagship program Biz Today. Before that, she has been a financial reporter for CRI's London correspondent bureau. She was actively involved in reporting the financial market in the city of London, and the Chinese economy as well.


The opinions expressed here are only personal, and do not necessarily represent CRI's official policy.

Read all opinion stories by Zhao Yang


 

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