Analysts at Westpac, suggests that amid growing trade tensions and given weak investment, Chinese authorities are starting to take a more active approach to policy.
Key Quotes
“At June 2018, annual headline GDP growth remained robust, printing at 6.7%. However, the six-month annualised pace moderated to 6.4%, just a tick above our full-year forecast. Critical to this deceleration has been persistent weakness in investment. Importantly, this is not because businesses are unwilling to invest, but rather as authorities are seeking to shift credit and investment from large unprofitable state-owned enterprises (SOE’s) to new industries that will drive growth in the long term. This is an abrupt change for the economy, one that will take time to work through.”
“Incorporated into our forecast of 6.3% growth in 2018 and 6.1% in 2019 is a modest uptrend in investment growth from the current historically low levels. With the investment outlook benign but uninspiring, consumption’s importance to GDP is set to grow.”
“At June, total consumption’s contribution to growth was unchanged from March at a heady 5.3ppts. Evident here is households’ confidence in the domestic outlook, increasing their willingness to spend out of savings to improve their quality of life. The reforms made to credit and the promotion of future investment in the most profitable sectors will aid household incomes, but only with a considerable lag.”
“Notably, employment has underperformed production based on the PMI data. It is for this reason (and authorities’ caution over leverage) that we believe growth in consumption will slow in the second half of 2018, and thereafter maintain a more modest pace in 2019.”
“To the above views, a further escalation of trade tensions is the key risk. The focus of our concern is investment given it is clearly susceptible to a shock. Any initial impact on investment would extend to employment and consumption in time, and could see growth print below 6.0% for a protracted period – absent a fiscal response.”
“This is why authorities will remain vigilant of domestic momentum. It is also why China is likely to respond to the US’ trade ire by improving relations with other nations. In time this will create a capacity to outperform via stronger investment; incomes and consumption, fulfilling President Xi’s vision for prosperity.”
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