Stronger Chinese monetary trends late last year suggested that economic growth would recover during the first half of 2016, contrary to consensus expectations of a further slowdown. Key indicators firmed through the spring but by less than had been expected here. Second-quarter GDP and June activity numbers released today were, on balance, more encouraging, while the monetary signal remains positive.
Annual growth of GDP in volume terms was unchanged at 6.7% last quarter but the more significant news was that nominal GDP expansion rose for a second successive quarter to 8.2%, the strongest since the third quarter of 2014. A rebound had been signalled by a pick-up in money growth from mid-2015. Annual increases in narrow and broad money (as measured by “true” M1 and M2 excluding financial sector deposits) were little changed in June, with recent growth the fastest since 2010 and 2013 respectively.
June activity numbers were mixed. Annual growth of industrial output and retail sales value rose to 6.2% and 10.6% respectively in June, beating consensus expectations. Fixed asset investment, however, slowed further, with an annual value rise of 7.3%, close to a September 2015 low of 6.8%.
Capex weakness reflects the private sector component, which stagnated in the year to June.
Prospects for private investment, however, are judged here to have improved. Industrial profits lead private capex and are rebounding on the back of stronger nominal GDP growth. A pick-up in growth of deposits of non-financial enterprises over the past year is a further positive signal.
An investment revival coupled with continued solid consumer spending expansion and an export pick-up driven partly by recent exchange rate depreciation may result in stronger volume as well as value growth of GDP during the second half, despite some reduction in fiscal stimulus.
*”True” M1 includes household demand deposits, which are excluded from the official M1 measure. Financial sector deposits are excluded from M2 because they are volatile and less relevant for assessing spending prospects.
Column by Henderson’s Simon Ward. Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
The information in this article does not qualify as an investment recommendation.