China’s economic rebound not on strong footing; room for PBoC to ease policy

The Chinese economic rebound is still not on a strong footing. Even if investment in infrastructure is growing, private investment is weakening. In May, China’s housing sector also slowed down due to macro-prudential tightening. There has been a rise in uncertainties to the outlook of global economy due to UK’s decision to leave the EU.

This would exert downward pressures on exports. This, along with negative PPI and subdued inflation calls for central bank policy makers to easing policy. There is space for further reduction in reserve requirement ratio and policy rate and also fiscal stimulus; however, the RMB is likely to continue being a source of stability, said HSBC.

China’s economic activity decelerated in the past few months after rebounding sharply in March. The housing market has also begun slowing as macro-prudential measures have diminished sentiment. Investment, as well as sales has decelerated. Private sector investment has been slowing steadily since 2012.

Most of the slowdown is in line with subdued overall economic and credit growth. However, overall fixed asset investment has been growing due to strong public sector investment, but private sector investment growth has receded from 10 percent at the end of 2015 to 1 percent in May 2016. This raises concerns that there is a more intense issue that affects private capex, according to HSBC.

China has hinted at an additional stance on fiscal expansion; however, deceleration in private sector investment might signify that the timing of fiscal expansion would have to be extended. Moreover, with Brexit, the balance of risks around growth might move further downward. China’s economic connections with the UK are not systematic enough to go ahead with aggressive stimulus. Just 2.5 percent of China’s overall exports go to the UK, while the UK accounts for below 1 percent of FDI.