July 2017

China Economy Update SUMMARY

China Economics Network

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Official data shows China’s economy expanded 6.9 per cent in the second quarter of 2017, unchanged from the previous quarter and well above the government’s target; Exports and retail sales were the bright spots, while infrastructure investment held up, and property market continued to strengthen despite tightening measures;

▪ A mixed picture on deleveraging: Money supply growth moderated but overall lending continues to grow at twice the rate of the economy.

Economic growth at 6.9, again

Sam Mackay First Secretary (Economics) British Embassy Beijing [email protected]

flat at 6.4 per cent. Services accounted for 54.1 per cent of GDP in value in the first half of the year, compared to 51.6 per cent last year. The strength appeared broad based: Data for trade, retail sales, industrial production, and fixed asset investment all came in above market expectations.

1. Official data shows China’s economy expanded at 6.9 per cent in the second quarter of this year, remarkably consistent with the previous quarter. This leaves the economy on track, comfortably, to hit the government’s annual growth target of around 6.5 per cent. (Figure 1)

Exports and imports rebounded 3. Official data shows that exports contributed to China’s growth in the first half of the year. In the first half of 2017, China’s goods exports, in USD terms, increased 8.5 per cent and imports 18.9 per cent.

Figure 1: Quarterly GDP Growth (% change on year before)

%

Nicole Liu Senior Economic Advisor British Embassy Beijing [email protected]

13.0 12.0 11.0

10.0 9.0 8.0

Industrial production remained robust

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4. In the first six months, China’s industrial output rose 6.9 per cent. Within this, high tech manufacturing grew 13.1 per cent. Industrial profits surged 22.7 per cent year-on-year, 16.3 percentage points faster than the same period last year.

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National GDP

Services

Manufacturing and heavy industry

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Agriculture

2. The services sector continued to support growth, expanding 7.7 per cent in the first half of 2017, a touch slower than last year, with growth of manufacturing and heavy industry

Retail sales beat estimates To view previous editions, 5. In the first six months 2017, growth of retail please of visit: https:// sales grew by 10.4 per cent over the last year. In particular, retail sales jumped 11 per cent in 1

China Economy Update – July 2017 June from a year earlier, slightly faster than May.

Money supply slows, but lending growth continues

6. Online retail sales surged 33.4 per cent in the first six months, with online merchandise sales growing 28.6 per cent and making up 13.8 per cent of China’s total retail sales, compared to 11.6 per cent same period last year.

11. Official data indicates growth of M2, a broad measure of money supply, slowed in the second quarter, dropped to 9.4 per cent in June, in the lowest since the series began in 1997 (Figure 3).

Infrastructure investment picked up

Figure 3: Increased Total Social Financing and Growth of Money

7. In the first half of 2017, fixed asset investment grew 8.6 per cent over last year, 0.5 percentage points higher than the annual growth of 2016.

RMB Billion

%

4,000

16

3,500

14 12

3,000

10

2,500

8

2,000

8. Growth of infrastructure investment accelerated to 21.1 per cent in the first half of this year from 20.9 per cent in the same period last year, and 17.4 per cent annual growth for 2016. (Figure 2)

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500

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% 30

New Increased Loans in RMB

Growth of broad money supply (M2, right axis)

Figure2 : Investment by sector (year to date, % on year before)

12. But growth of Total Social Financing (TSF), an indicator for bank lending and credit by nonbank financial institutions, remained strong, up 13.9 per cent in the first half of 2017 over the same period of last year.

25 20 15 10 5

13. China’s central bank (PBoC) attributed the moderation in M2 growth to financial deleveraging.

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FAI

Property measures

Real Estate FAI

market

Manufacturing FAI

defies

Infrastructure FAI

More efforts needed for rebalancing 14. Behind the strong GDP growth numbers, investment’s contribution to GDP growth rebounded to 32.7 per cent (year to date) in the second quarter of 2017 from 18.6 per cent in the first quarter, suggesting ‘rebalancing’ has some way yet to go.

tightening

9. In the first half of 2017, real estate investment grew 8.5 per cent over last year, 0.6 percentage points faster than yearly growth in 2016.

15. At the high level financial meeting last week, Xi Jinping called for increased efforts to reduce leverage in the economy beyond the financial system, highlighting debt in state-owned companies and announcing strict limits on local government new debt. It remains to be seen how effective these measures will be.

10. Overall housing sales continued to grow, despite targeted tightening measures in different cities since late last year. Growth of floor areas sold soared 21.5 per cent in June from 10.2 per cent in May, mainly thanks to local governments’ shanty town redevelopment plan of financing low income households to buy houses in third and fourth tier cities. 2