China to grow 6.3 pct sequentially in Q3, PBoC likely to cut rates in Q1 2017

China’s activity indicators in August rebounded throughout the board after a weak data in July. Retail sales and industrial production came in higher, whereas FAI growth stabilized at lower levels. On the back of a rebound in economic activity, new loans rose considerably and total social financing also rebounded noticeably. These data are in line with the better NBS manufacturing PMI output in August and stronger recovery in import growth.

In August, FAI stabilized at 8.1 percent year-on-year. On monthly basis, growth recovered to 8.1 percent in August from July’s record-low growth of 4 percent. The breakdown implies that infrastructure investment growth continued to be strong, expanding 19.7 percent year-on-year year-to date in August, driven mainly by a rise in transportation investment growth.

Meanwhile, housing market activities came in mixed with sales rebounding; however, housing starts retreated. Real estate investment growth rose 5.4 percent year-on-year in August with residential investment rebounding to 4.8 percent. Meanwhile, commercial investment dropped to 6.7 percent.

“Reflecting better data and intensified fiscal efforts since August, we raised our Q3 and Q4 sequential growth forecasts by 20bp respectively, to 6.3 percent q/q saar and 6.1 percent, compared with c7 percent in Q2”, said Barclays in a research note.

The GDP growth outlook was also raised by 50 basis points to 6.2 percent, on improvement in momentum of domestic growth over second quarter to fourth quarter and better than expected external growth in spite of Brexit.

The government’s attempts to stimulate infrastructure investment growth and private investment have been underlined in the recent weeks. In all, the economy is likely to continue facing downside risks, with the property market and manufacturing investment being the main risks to monitor.

On macro policy outlook front, the fiscal measures and infrastructure projects are expected to assist in arresting the growth slowdown, while a more neutral monetary policy stance is expected in the near term, according to Barclays. The Chinese government seems to have sufficient fiscal space to underpin a gradual moderation in growth in the months ahead. Meanwhile, on the monetary policy front, the PBoC is likely to lower rate in the first quarter of 2017, as compared with the earlier estimate of third quarter of 2016, added Barclays.