Expecting a Growth Rebound

CHINA - Forecast 12 Aug 2015 by FAN Gang and Chunyang Wang

Though growth is still low, we expect it to pick up in H2, driven by several positive factors. GDP grew 7% y/y in Q2, flat on Q1.

The GDP deflator grew 2.54% y/y in Q2, up 1.12 pps from Q1. Although prices are picking up, and are slightly higher, both domestically and compared with other developing countries, prices are generally still quite low – which leaves quite a bit of room for policy easing.

Public fiscal revenues rose 6.6% y/y in H1, and spending rose 11.8% y/y. The trade surplus in Q2 was $139.6 billion, maintaining its previous high levels due to weak imports. Calculated capital outflows were still above $200 billion, comparable to the levels of the past year. We expect the capital outflow situation to improve, as growth pickup in H2 will do away with the China collapse narrative, and henceforth boost investors’ confidence.

The yuan’s exchange rate to the dollar was virtually steady, appreciating only 0.06%. But the yuan depreciated 2.73% against the euro.

Chinese travelers spent $164.8 billion overseas in 2014, more money than tourists of any other country. On April 28th, Prime Minister Keqiang Li held a state council executive meeting, where he set forth a timeline to slash tariffs and taxes on consumption goods, in an effort to increase domestic consumption. We expect such policies to stimulate weak domestic consumption and imports. Tax cut policies have been driven by economic opening. The recent “One Belt, One Road” project, and free trade zones, are other examples of this opening.

The stock market was volatile, after hitting the second highest level in its 20-year history. The boom was partly a consequence of a seven-year bear market. Other supporting factors include looser monetary policy, and a reduction of burdens on private firms. However, poor protection of investors’ rights, especially the rights of small investors -- the key determinant of stock market development – persist, and the situation cannot be improved in the short term. So, though we think the stock market boom can be sustained for some time, it can’t last forever.

The real estate market quickly recovered in Q2: property sales volumes shifted from falling -9.2% y/y in Q1 to rising 13.2% y/y. The recovery is due to stock market volatility, which is driving risk-averse investors to shift money into real estate. Stock market performance is now more related to protection of investor rights, which China cannot improve in the short term, while the real estate market is more closely linked to the real economy. China’s ability to smooth its economic cycles, due to the central government’s strong budgetary situation, means real estate investors face less risk.

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