China: Economic activity growing a bit slower - ING

Iris Pang, Economist at ING, explains that China’s economic activity is growing a bit slower but not too badly, which means deleveraging reforms can continue.

Key Quotes

“Although still a positive picture, the economy is not growing as fast as we had expected.”

“Retail sales grew slower in July (actual: 10.4%; INGF: 11.5% YoY; prior: 11.0%). We rightly forecast that consumer spending on vehicles would be strong (+8.1%YoY in July compared to 5.6% Jan-Jul) now that it is more difficult for households to use “spare cash” to buy extra homes (due to tighter regulations on home purchases). However, spending on crude and gasoline slowed to 5.6%YoY from 9.8%in June). And other items in retail sales did not reflect what we thought might be a summer spending hype.”

“Industrial production is also not running as well as we had thought (actual 6.4%; INGF: 7.8% YoY; prior: 7.6%). Metal sectors demonstrated only moderate growth (black metal +2.1%, overall metals production +5.4%). Although global and domestic demand for consumer electronic goods continue to account for most production, this sector saw growth slow down from 14.6% YoY to 11.8% YoY in July. This might reflect that export orders are not piling up and sales in coming months could be moderate.”

“Fixed asset investment (FAI) slowed slightly too as expected (actual: 8.3%; INGF: 8.5% YoY; prior: 8.6%). 20.9% YoY growth in infrastructure (contributed 21% to FAI) was balanced by more moderate growth of 7.9% in real estate (contributed 23% to FAI). Growth in property development was sluggish because more cities are imposing tighter home-buying policies.”

“Looking forward, if housing policies continue to tighten, growth in fixed asset investments will slow further, but that also means that spare cash in the hands of consumers will help boost retail sales.”

“Although the latest set of activity data are not particularly amazing, the economy is still running better than last year, which means cleaning up overcapacity industries can continue. The government is gathering comments on the detailed framework of its debtto-equity swap structure. This indicates debt-to-equity swaps could play an important role during the deleveraging process. Apart from deleveraging tools, the government is proceeding the clean-up process from one sector to another. Positive results from cleaning up the coal and steel sectors (at least prices of these materials are no longer deflating) are setting the model for cleaning up cement and glass.”

“In short, even if economic activity is not providing any upside surprises, it is good enough to keep deleveraging going, though at a slow enough pace to keep the economy on track.”