China: Still on Track
The Chinese economy grew by 7.6 percent in the second quarter of 2012, year over year. That’s a respectable growth rate in our view, but the doomsayers are proclaiming, once again, the total collapse of the Chinese economy.
True, this rate for China represented the slowest growth since the first quarter of 2009, but it shouldn’t have come as a surprise considering the rest of the world’s economic challenges, especially in Europe.
The era of double-digit gross domestic product (GDP) growth in China is over, as the country tries to stabilize and increase the number of people that can participate in economic prosperity. As a result, any growth above 7 percent should be seen as a positive for China’s future, because it reflects sustainable growth.
Our view remains that the Chinese economy will deliver 8 percent GDP growth in 2012, especially if the infrastructure projects originally scheduled for this year are firmly back on track and residential property recovers in the second half.
That said, as the Chinese economy proceeds with its soft landing, the numbers have been mixed. Industrial production rose 9.5 percent YoY in June, a relatively weak number, while fixed asset investment rose 21 percent YoY, versus 19.8 percent YoY in May.
China’s exports were up 9.2 percent in the first half of the year, a bright spot in the context of Europe’s problems and slow growth in the US. A severe European slowdown appears to be the only way that China could see lower than 8 percent GDP growth this year.
Retail sales growth was also solid at 13.7 percent YoY in June, although it has been mildly retreating. Beijing’s efforts to boost lending seem to be stabilizing the economy (see chart, below). At the same time, low household debt and rising income continue to offer sustainable support to consumption in China. For the first half of the year, real urban income rose 9.7 percent, while real rural income rose by 12.4 percent.
Source: Bloomberg
Earlier this year, inflation was considered the main threat to the Chinese economy, especially for food. However, prices have fallen and deflation is seen as the new threat.
Headline CPI was 2.2 percent in June, down from 6.4 percent a year ago. CPI for the first half of the year is down to 3.3 percent and should average around 3 percent for the year. Declining inflation does not seem to be a big problem for the Chinese economy, as nominal income growth remains solid.
Without ignoring the long-term challenges that still face the Chinese economy, it’s likely that China will deliver again this year.
Chinese authorities will try to avoid over-stimulating the economy, unless excessive numbers of migrant workers get laid off. If there’s any country in the world with the flexibility and leeway to proceed with a stimulus plan, it’s China. Total government debt in the country stands at less than 40 percent of GDP, a figure most other countries would envy.
The upshot for investors: Don’t count out China.
True, this rate for China represented the slowest growth since the first quarter of 2009, but it shouldn’t have come as a surprise considering the rest of the world’s economic challenges, especially in Europe.
The era of double-digit gross domestic product (GDP) growth in China is over, as the country tries to stabilize and increase the number of people that can participate in economic prosperity. As a result, any growth above 7 percent should be seen as a positive for China’s future, because it reflects sustainable growth.
Our view remains that the Chinese economy will deliver 8 percent GDP growth in 2012, especially if the infrastructure projects originally scheduled for this year are firmly back on track and residential property recovers in the second half.
That said, as the Chinese economy proceeds with its soft landing, the numbers have been mixed. Industrial production rose 9.5 percent YoY in June, a relatively weak number, while fixed asset investment rose 21 percent YoY, versus 19.8 percent YoY in May.
China’s exports were up 9.2 percent in the first half of the year, a bright spot in the context of Europe’s problems and slow growth in the US. A severe European slowdown appears to be the only way that China could see lower than 8 percent GDP growth this year.
Retail sales growth was also solid at 13.7 percent YoY in June, although it has been mildly retreating. Beijing’s efforts to boost lending seem to be stabilizing the economy (see chart, below). At the same time, low household debt and rising income continue to offer sustainable support to consumption in China. For the first half of the year, real urban income rose 9.7 percent, while real rural income rose by 12.4 percent.
Source: Bloomberg
Earlier this year, inflation was considered the main threat to the Chinese economy, especially for food. However, prices have fallen and deflation is seen as the new threat.
Headline CPI was 2.2 percent in June, down from 6.4 percent a year ago. CPI for the first half of the year is down to 3.3 percent and should average around 3 percent for the year. Declining inflation does not seem to be a big problem for the Chinese economy, as nominal income growth remains solid.
Without ignoring the long-term challenges that still face the Chinese economy, it’s likely that China will deliver again this year.
Chinese authorities will try to avoid over-stimulating the economy, unless excessive numbers of migrant workers get laid off. If there’s any country in the world with the flexibility and leeway to proceed with a stimulus plan, it’s China. Total government debt in the country stands at less than 40 percent of GDP, a figure most other countries would envy.
The upshot for investors: Don’t count out China.
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