China’s economic growth likely to expand 6.7 pct this year

The recently released economic data for China imply that the momentum of growth has stabilized. The PMI for the month of August rose to 50.4, the highest level since October 2014. Industrial output has gradually rebounded from the low of 5.6 percent year-on-year recorded in October to 6.3 percent in August. Following a period of huge decline, private sector investment stabilized at 2.1 percent in the January to August period, flat from the earlier month. Meanwhile retail sales in August also beat market expectations by 0.4 percentage points and were up 10.6 percent.

“We revise our GDP forecast upward to 6.7 percent for 2016 and 6.5 percent for 2017, compared with our original projection of 6.4 percent and 6.2 percent, respectively”, said ANZ in a research note.

In the first half of 2016, China’s headline economic growth surpassed the anticipated projection of 6.4 percent by 0.2 percentage points due to the improvement in real estate and solid service industry growth, urging to adjust projections upwards, stated ANZ. Moreover, the property sector is not indicating any signs of slowing down.

Even if certain cities have begun implementing policy tightening because of worries about overheating, the effect is likely to be regional. However, the second half GDP of the financial industry would probably gain from a low base for comparison, recalling the stock market collapse in July 2015. According to ANZ, the overall economic performance is unlikely to worsen in the second half. For the whole of 2016, the Chinese economic growth is likely to fall within the government’s target range of 6.5 percent to 7 percent.

But, there might be certain industrial and geographical divergence. SOE investment continued to be a key growth driver, whereas private sector investment continued to be weak. Investment in secondary industry rose just 3 percent in January to August period, whereas investment in the tertiary industry rose to 11.2 percent. The divergence of PMI performance between huge corporates and small-and-medium sized enterprises also implies the benefits of structural reform and are not widespread.

The divergence also intensifies geographically due to the structural reform. The severe drop in industrial production in north-eastern China has considerably weighed on GDP.