Photo by China Government

By Yating Xu, Economist, IHS Markit

Key Points:

  • Chinese GDP expanded by 6.9% year on year (y/y) in the second quarter of 2017, the same as the first quarter and slightly above our expectation of 6.8% y/y.
  • Industrial value-added output grew 7.6% in June, accelerating from 6.5% in April and March, in line with the first quarter, which was the fastest monthly growth in two years.
  • Fixed-asset investment (FAI) grew 8.6% in June, the same rate as May, while slowed from 9.2% in the first quarter.
  • The housing sector activity improved. Floor space sold accelerated in June after two consecutive months of slowdown. Land purchase growth improved in June to 38.5%, from 32.4% in May.
  • China’s retail sales growth rebounded to 11% in June from 10.7% in May.
  • A monthly index of service sector growth expanded 8.3% in June, accelerating from 8.1% in May and in line with the first quarter.

IHS Markit Views:

Although Chinese GDP growth exceeded expectations in the first half, we still expect downward momentum in the second half of 2017.

Although faster manufacturing investment and manufacturing production will continue to be a positive factor in the second half, the total impact will be balanced out by the headwinds from other sectors, such as real estate sales and investment. As the housing inventory continued to decline, the supportive government policy for housing sales is likely to be scaled back in more cities. Moreover, real estate investment growth will gradually decline due to the “cash reimbursement policy” applied in the shantytowns renovation, although housing sales may continue to grow fast in the short term.

In addition, fiscal spending is likely to slow in the second half, since the higher-than-target GDP growth in the first half indicates the government can scale back their proactive fiscal policy that had been used to drive the economic growth in the first half of 2017.

Also, stricter scrutiny on public-private-partnership (PPP) financing may act as a more significant drag on infrastructure investment.

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