The Chinese National Bureau of Statistics released a set of data today, suggesting that the economy is continuing to stabilise in the second half of the year. Looking into the data and the rhetoric of a key official, we believe there is increasing evidence that the Central Government’s monetary stance will become less aggressive going forward.
The rebalancing of consumption and investment continues
Retail sales expanded 10.6% YoY in August, higher than the 10.2% in the previous month (see Chart 1). On a year-to-date (YTD) basis, retail sales have grown by 10.3% YoY in the first eight months of 2016. The strong retail sales were largely supported by the 8% YoY increase in per capita disposable income for an average urban household during the first half of the year (see Chart 2). With consumer price inflation staying relatively flat at 1.3% in August and 2% in the first eight months, purchasing power should continue to be a key pillar of support for the Chinese economy.
The new set of data has also eased worries about another key pillar of the economy – investment. YTD fixed asset investment (FAI) expanded 8.1% YoY in August, compared to the 7.9% YoY growth in July (see Chart 3). The acceleration was largely contributed by the further investment in the tertiary sector (57.6% of total FAI in 8M2016), which – after growing only 6.5% in July on a monthly basis – saw investment rebounding to grow 13.1% YoY in August. With government officials stressing that the services sector will take up a bigger role in the economy going forward, further investment in the Chinese economy should continue to be concentrated in relevant industries in the short-to-medium term.
Implications
As the economy continues to stabilise, we are of the view that the Central Government can now put stronger focus on structural reforms, such as slowly reducing the leverage of the economy. [1] In a recent interview (see here), Jun Ma, Chief Economist of the Research Bureau at the People's Bank of China , suggested that there should be a target to lower the credit growth rate. In the interview, Ma repeatedly referred to the real estate market as a significant contributor to the leverage in the Chinese economy and suggested that “many measures still need to be taken in the field of real estate to prevent excessive growth of a bubble, and to curb excessive financial resources flowing into the industry.” Nothing is set in stone, but we believe monetary expansion is to be reduced, and the real estate market development will be a main area to watch out for in the near future.
[1] HKGCC (15 July 2016) Time to halt rapid monetary expansion
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