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Macquarie: China’s growth will slow down in the second half of 2017

Macquarie: China’s growth will slow down in the second half of 2017

Image source: Macquarie Malaysia Warrants

On 18 July 2017, Macquarie Malaysia Warrants reported via e-mail.

Yesterday, China reported their growth domestic product (GDP) for 2017, rising 6.9% from the previous year, beating analysts’ consensus at 6.7%. The better-than-expected GDP was mainly driven by the property market which has done very well. Yesterday, the National Bureau of Statistics (NBS) was cited in Xinhuanet as saying that “the nation performed within an appropriate range with more visible good momentum.”

Following this, Macquarie Equities Research (MQ Research) released a report on China’s GDP, making sense of the numbers. While China’s current GDP result remains strong, MQ Research shared their view that it will slow down in the second half of 2017. Read on to find out why…


China’s GDP grew 6.9% year-on-year (yoy) in 2Q17, same as in 1Q17, and beat the consensus at 6.7%. The single-most important driver is the stronger-than-expected property market. Overall, the incoming data in June are positive to financials and cyclicals, as the economy turned out to be more resilient than expected. Looking ahead, MQ Research expect GDP growth to slow to 6.7% yoy in 3Q17, then to 6.6% in 4Q17, as MQ Research believe that the strong performance in the property market in 1H17 is unsustainable. That said, the current strong growth momentum means that it is almost sure for policy makers to deliver the 6.5% growth target this year. As such, the next few months remain as the window for financial regulation, although policy makers would be more careful in the run-up to the Party Congress this Fall.

‌China’s economy rebounded in June after its peak in 1Q17. Industrial production growth jumped to 7.6% yoy from 6.5% in May. Fixed Asset Investment growth (for June alone) also accelerated to 8.8% yoy from 7.8% in May. Retail sales growth edged up to 11.0% yoy from 10.7% in May. It’s also in line with the higher purchasing manager index (PMI) and export data released earlier. In sum, production, investment, consumption and exports all performed better in June. In 1H17, nominal GDP grew 11.4% yoy, the best half since 2011. Personal disposable income rose 8.8% yoy, boding well for consumption growth. It’s good news for top leaders who could concentrate on power transition in the next three months.‌

However, MQ Research believe the stronger-than-expected data in June is a blip amid a growth deceleration, rather than pointing to a new cyclical upturn. The main driver of the Chinese economy remains the property sector, which has done extremely well in 1H17. Property investment growth accelerated to 8.5% yoy in 1H17 from 6.9% in 2016. National property sales, which is all driven by tier3/4 cities, grew 16% yoy in 1H17. Therefore, the key question is, which direction the housing market will head to in 2H17. Our view is that it’s much more likely to go down than to hold up, as more and more headwinds are gathering for the sector, including higher mortgage rates, sales frontloading and policy tightening. That said, given the current market sentiment and sales momentum, the slowdown in the housing market would be gradual in the next few months. But next year will be more challenging and we think policy makers would be well-advised to lower the growth target for next year.

‌Policy implications: Still the window for financial tightening: Now is a rare moment of relaxation for China’s policy makers. In each of the last seven years, there has been a moment when the financial markets thought a China collapse was imminent. Not this year. At this moment, growth is running stable and inflation is low. The renminbi (RMB) is strengthening and the global economy is recovering. In the near term, the tug of war between growth and liquidity played in 1H17 would continue: improved growth means that policy focus will remain on financial regulation. More importantly, China’s policy makers are starting to think about the next five years. In the past five years, we have seen two mini-cycles in the economy and four boom-and-bust cycles in the financial markets. The next five years are set to be more eventful and that’s why MQ Research think the message from this National Financial Work Conference more significant than it looks.

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