1. Even as China posts better than expected Q2 growth, analysts warn of risks

Even as China posts better than expected Q2 growth, analysts warn of risks

China posted better-than-expected second quarter growth today, but analysts warned that the momentum will not last as authorities clamp down on rising debt.

By: | Beijing | Published: July 17, 2017 2:10 PM
china, china economy, china q2 growth, china news, china latest news, china risks, china economy risks President Xi Jinping called for tougher regulations to crack down on financial risks during a weekend National Financial Work Conference, which sets the tone for reforms, according to state media. (Reuters)

China posted better-than-expected second quarter growth today, but analysts warned that the momentum will not last as authorities clamp down on rising debt. The economy expanded 6.9 per cent in April-June, the same as the previous three months and better than the 6.8 per cent tipped in an AFP survey. “The national economy has maintained the momentum of steady and sound development in the first half of 2017, laying a solid foundation for achieving the annual target and better performance,” national statistics bureau spokesman Xing Zhihong said.

“However, we must be aware that there are still many unstable and uncertain factors abroad and long-term structural contradictions remain prominent at home,” Xing told reporters. Industrial production grew 7.6 per cent in June while retail sales were up 11 per cent, both better than the previous month, according to the official data.

But analysts expect a deceleration of the overall economy. “China’s strong first half to the year won’t last,” Julian Evans-Pritchard, China economist at Capital Economics, said in a note.

“The recent crackdown on financial risks has driven a slowdown in credit growth, which will weigh on the economy during the second half of this year,” he said. Debt-fuelled investment in infrastructure and real estate has underpinned China’s growth for years but Beijing has launched a crackdown over fears of a potential financial crisis.

Fitch Ratings on Friday maintained its A-plus rating for the country for China but said its growing debt could trigger “economic and financial shocks”. The statement followed Moody’s decision in May to downgrade China for the first time in almost three decades on concerns over its ballooning credit and slowing growth.

President Xi Jinping called for tougher regulations to crack down on financial risks during a weekend National Financial Work Conference, which sets the tone for reforms, according to state media. The government will continue to deleverage the economy through prudent monetary policy and by reducing leverage in state-owned enterprises, Xi said.

The conference showed that authorities will intensify financial regulation “unprecedentedly, through a much more centralised and empowered organisational set-up”, ANZ’s China economist Raymond Yeung said in a note.

“Debt reduction will become an important consideration in monetary policy,” Yeung said, predicting more corporate defaults and a tightening of credit policy among banks.

Despite the economic deleveraging, however, “we do not think this event will trigger an immediate monetary tightening”. Analysts expect tighter restrictions on property purchases and bank lending will continue to weigh on the economy in the months ahead.

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But a sharp slowdown in the second half is unlikely as policymakers prepare for an important Communist Party congress later this year that will likely cement Xi’s place as the most powerful leader in a generation. “It is therefore highly probable that authorities will use the resources and policy tools at their disposal to ensure a positive economic outcome,” Citibank said in a note. The government has trimmed its 2017 growth target to around 6.5 per cent, after it expanded 6.7 per cent in 2016 — its slowest rate in more than a quarter of a century.

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