by Brian Jackson, China Economist of IHS Globa Insight
China’s National Bureau of Statistics reports that second quarter GDP growth was unchanged at 6.7% year on year. Primary and secondary sector real growth accelerated 0.2 and 0.5 percentage points, respectively, while tertiary sector growth slowed 0.1 percentage points. We estimate the quarter-on-quarter seasonally adjusted annualized rate (SAAR) of GDP growth was 7.4%, compared to 4.8% in the first quarter.
The acceleration in secondary sector growth was primarily due to faster industrial sector growth, led by utilities. Nominal investment growth was only 9%, compared to 10.7% in the first quarter, indicating limited scope for an improvement in headline construction activity within GDP. Within that, state-owned enterprise and government-funded investment continues to expand at more than twice the pace, while non-state investment growth slowed to only 2.8%. Official industrial output growth accelerated to 6.2% in June and averaged 6.1% in the second quarter, compared to 5.8% during the first quarter. The acceleration in industrial output was mostly due to utilities, where growth accelerated 1.6 percentage points to 4.0%. We estimate month-on-month SAAR of industrial output growth was 5.8% in June, compared to a 5.5% average during the second quarter.
The tertiary sector slowdown likely came from real estate and finance. Real estate activity remains strongly positive, but decelerating steadily compared to the first quarter. Growth in sales receipts of all types of buildings decelerated by over 10 percentage points between March and June, while growth in square meters sold decelerated by about 5 percentage points. With regards to finance, stock market trading volume contracted by 61% in the second quarter, compared to a 15% contraction in the first quarter, and total social financing flows were about half the level of the first quarter. Given expectations of significant decelerations in these service sectors, it is likely that the government dominated ‘other services’ growth will report stability or improvement and serve as a counterbalance. China will report detailed sector-level GDP on 16 July.
Outlook & Implications:
China’s growth has surprised on the upside. Unsurprisingly, the better-than-expected performance appears to be concentrate in state-led sectors. This will continue to fuel misgivings about the quality of Chinese data, or the quality of Chinese growth. The first misgiving reflects concerns that the government is squeezing as much growth as plausible from relatively opaque sectors via accounting techniques. The second misgiving reflects concern that if the data is wholly accurate, then it implies a deepening shift towards state-led growth in both the secondary and tertiary sector, which raises major doubts about the long term productivity and thus sustainability of current economic activity.