China’s economy grows 6.7 pct in Q2; stabilization unlikely to sustain

The Chinese economy grew 6.7 percent year-on-year in the second quarter of 2016, confirming stabilization in the economy. However, the stability is unlike to be sustained, noted Nordea Bank in a research report. The consensus expectation was for the economy to expand 6.6 percent year-on-year.

On a quarter-on-quarter basis, the Chinese economy grew 1.8 percent. China’s economy appeared to be in a better mood in the second quarter as compared to the first quarter that recorded a quarterly growth of 1.2 percent.

Huge monetary and fiscal stimuli from the nation are likely to have supported the better than expected momentum. But the stability is expected to be short-lived and the growth is likely to resume its declining trend in the second half of 2016.

For the whole of 2016, the Chinese economy is expected to expand at the pace of 6.5 percent, according to Nordea Bank. The Chinese markets did not give a strong reaction.

Positive sentiment was seen in both the consumer and producer sectors. Industrial production growth surprised on the upside in June by expanding 6.2 percent year-on-year, while retail sales grew 10.6 percent year-on-year in the month.

But the other data indicated that government stimuli mostly drove the economic growth. Via bank lending, monetary policy was loosened.

A record amount of CNY 7.5 trillion was given out by the Chinese banks in the first half of 2016. Moreover, the fiscal policy has also been aggressive. Even if the total fixed assets investment rose just at a multi-decade low pace of 9 percent year-on-year, public investment growth expanded 23 percent year-on-year.

The structural downward pressure continues to be solid and the Chinese economy is becoming less responsive to policy stimuli. This would make the second quarter stabilization short-lived. The economic growth would be weaker in the second half of 2016.

The Chinese government is expected to maintain the economic policy quite accommodative in a bid to avert a deeper slowdown. Additional easing measures are also expected, noted Nordea Bank.

“Specifically, we expect the RRR to be cut twice of a total of 100bp and a rate cut of 25bp before year-end,” added Nordea Bank.

Liquidity conditions are expected to be kept lose with longer-term bank lending and short-term open-market operations. Moreover, public infrastructure investment is expected to remain aggressive in order to boost domestic demand.

On the currency front, CNY is likely to remain weak against USD and the currency basket, unless there is a widespread USD depreciation. China possibly sees the CNY as overvalued that explains no motivation to curtail the weakness. Meanwhile, the authorities are not interested in too much weakness in CNY against the US dollar because of their concerns for deeper capital outflows, according to Nordea Bank.

“We expect around 1 percent depreciation for the remaining of the year, when the USD/CNY is forecasted to reach 6.73,” added Nordea Bank.