Caixin View: Slowdown in GDP Growth Masks Consumption Strength

China’s economic growth decelerated marginally to 6.7% year-on-year in the second quarter of 2018 from 6.8% in the first quarter, government data released Monday showed. The increase in real gross domestic product (GDP) hasn’t been this low since 2016, and follows three quarters of unchanged growth of 6.8%.

But beneath the relatively benign slide in the headline number, there are some more worrying trends. The monthly activity data released by the National Bureau of Statistics (NBS) showed a continued slowdown in government-led infrastructure, due partly to the central government’s tightened control over the public-private partnership initiative designed to attract private capital to fund construction projects like roads, bridges and hospitals. A crackdown on banks’ off-balance-sheet activities has also limited the ability of local government financing vehicles, the main source of non-budget funding for local authorities, to raise money.

Investment has traditionally been a key driver of GDP and the government has in the past turned on the investment taps to support the economy when growth looked as if it were dropping below policymakers’ tolerance. However, in spite of the slowdown, we don’t expect a major fiscal stimulus to boost infrastructure spending in the second half of the year.

That’s because the data released Monday indicate that the economy is performing better than expected. Growth in infrastructure investment, which is driven by government spending, slowed sharply without having a significant effect on GDP growth or on employment. Investment in the construction of roads, railways and other public facilities, excluding electricity and other utilities, rose just 7.3% year-on-year in the first six months, slowing from 9.4% in the first five months and marking the sixth straight month of deceleration. But GDP growth only slipped by 0.1 percentage points; and the surveyed urban unemployment rate in June was lower than that at the beginning of the year, at 4.8%, compared with 5% in January.

Secondly, even though export growth beat expectations in June, we think trade will increasingly drag on GDP over the second half of the year –– as we argued last week, there is little sign U.S.-China trade tensions will ease off anytime soon. Economic growth will instead be more dependent on domestic demand, with consumption playing an increasingly important role. The second-quarter data is more encouraging here: consumption’s support for growth is always boosted in the first quarter by Chinese New Year festivities, but it remained high in the second quarter, contributing 5.3 percentage points of the 6.7% total growth, according to the NBS, indicating some positive structural changes are taking place in the economy.

Weekly Roundup

Macro &Finance

Chinese regulators may delay the release of regulations for the country’s 30 trillion yuan ($4.5 trillion) wealth management product (WMP) business in case they stoke further distress in the stock, bond and foreign exchange markets, Caixin has learned.

Local governments cut back on the amount of bonds they issued in the first half of 2018, but are expected to ramp up sales in the next six months to meet a deadline set in a three-year cleanup of local government borrowing.

Total social financing, the People’s Bank of China's broadest measure of credit, was 1.18 trillion yuan ($176.4 billion) in June, a significant increase on May’s 760.8 billion yuan but still below analysts’ expectations.

China’s export growth beat market expectations in June, while import figures hinted at weakening domestic demand as China-U.S. trade tensions intensified. The State Council is trying to boost imports to make trade more balanced and has told companies to increase purchases from countries involved in the Belt and Road Initiative as the row with Washington escalates.

China is raising the financial bar for cities seeking approval for new subway and light rail projects to rein in infrastructure investments that lead to an increase in local government debt.

China’s top policymakers signaled that the country’s state-owned financial institutions, including banks, securities firms and insurance companies, will remain at the heart of financing the country’s development, and they called for improvements in the management of the companies and the funds they control to better serve the economy.

China’s National Audit Office (NAO) will set up three new units to strengthen its supervision of financial regulators and major state-owned financial institutions, Caixin has learned, as the ongoing national anti-graft campaign extends its reach into the financial sector.

China’s factory inflation hit a six-month high in June mainly due to a lower comparison base last year and rising oil costs, while consumer prices remained stable.

Thousands of foreigners working in China will soon be able to enjoy the roller coaster ride of the country’s equity markets as regulators consider opening trading to individuals of other nationalities.

Companies

A new wave of Chinese tech companies are planning forays into public markets to raise billions of dollars through initial public offerings. But some of them may face a bumpy ride amid volatile markets and escalating trade tensions.

Embattled Chinese telecom giant ZTE Corp. breathed a sigh of relief after the U.S. government finally lifted its trade sanctions against the firm on Friday.

The shares of financial conglomerate HNA Group Co. Ltd. held by co-founder Wang Jian, who died in an accident in France, will be donated to charity in accordance with his wishes, CEO Adam Tan said at Wang’s memorial service on Friday, a source told Caixin.

The parent of China Fortune Land Development Co. Ltd. (CFLD) has sold 580 million shares of the Shanghai-listed real estate developer to the investment arm of Ping An Insurance for $2.07 billion.

Chinese sovereign wealth fund China Investment Corp. (CIC) booked its best annual performance last year with a 37.5% increase in net profit, thanks to record returns from overseas portfolios.

Global tech giant Apple Inc. said it will lead the launch of a $300 million fund to promote clean energy in China, representing the latest green initiative in one of its largest markets.

Calendar

July 17: National Bureau of Statistics releases June data on housing prices in 70 medium and large cities