Time to halt rapid monetary expansion
On the back of strong credit growth, the Chinese economy continued its stabilisation in the second quarter. Real GDP expanded 6.7% YoY during the quarter, consistent with the trend in Q1 of 2016. On a quarter-on-quarter (QoQ) basis, the Chinese economy expanded at a faster pace of 1.8% in 2Q2016, compared to the 1.2% QoQ growth in the previous quarter, suggesting that concerns of the economy could be eased. Nevertheless, with the decline in velocity of money, we believe it is about time to halt rapid monetary expansion.
Services and consumption continue to expand
The tertiary industry continued to be a major contributor to growth in the second quarter, while the secondary industry appeared to have gained much momentum from the previous quarter. In nominal terms, the tertiary industry expanded 11.5% YoY, while the secondary industry – consisting of construction and manufacturing sectors – recovered and grew 5.9% YoY, compared to the sub-1% growth rate in the three previous quarters (see Chart 1).
With industrial production expanding at 6.2% YoY in June, different indicators are pointing to easing pressure in the Mainland. Although we remain cautious and are still hesitant to suggest that the worst is behind us, the rebound of the secondary industry is providing the much needed support to industry participants which hire roughly 230 million people in the country.
While the National Bureau of Statistics will only publish the value-added of major industries until later this month, the economic strength is obviously driven by consumption (see Chart 2). Retail sales rose 10.6% YoY in June and 10.3% on a year-to-date (YTD) basis, which was supported by the strong new employment growth during the quarter (+1.3% YoY) and disposable income growth (YTD 8% YoY).
On the other hand, the moderation of investment is much quicker than expected. YTD fixed asset investment (FAI) growth slowed to 9%, compared to 9.6% in May, which suggested that FAI growth in June declined to 7.3% YoY. Much of the decline was dragged by the sharp fall in investment by the secondary industry (+0.7%), and particularly the manufacturing (-0.4% YoY) and mining (-27.2% YoY) sectors. Moreover, as suggested in the July issue of Bulletin, despite the much improved property market sentiment, property developers are remaining conservative in their investment decisions.
The slowdown in investment, despite the massive expansion of the monetary base, could be of concern.
Led by bank lending, aggregating financing activities jumped in June. After two consecutive months of modest lending behaviour, banks extended RMB1.3 trillion worth of loans in June, while non-bank financers chipped in with around RMB317 billion in financing. On the other hand, M1, a narrower definition of money supply, continued to expand at a jaw-dropping rate as it soared 24.6% in June (see Chart 3). While the ballooning availability of credit is helpful for stabilising growth, it could add to the already-mounting worries of the leveraged nature of the economy.
What to expect
As the velocity of money continues to decline, we argue that continuous adoption of a loose monetary stance on stimulating the economy is becoming inefficient. After pocketing some respectable growth in the first half of the year, we suspect the government will step up its efforts to deleverage the economy in the second half of this year.
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