Indicators point to cautious optimism, but funds from stock market may flow to property
The Chinese economy beat market expectations to grow 7 percent year-on-year in the second quarter, a performance suggesting that the world's second-largest economy may have bottomed out despite uncertainties ahead.
An analysis of China's latest economic data can well justify cautious optimism about the future.
Above all, the Chinese economy remains resilient, despite its apparent slowdown when compared with a few years ago.
Three aspects reinforce this resilience.
First, employment remains robust. In the first half of the year, China created 7.18 million jobs, accounting for 71.8 percent of the government's annual target. This showed that the slowdown in economic growth didn't shake the foundation of the labor market. The stability in the job market means the economic slowdown is under control.
Second, the average disposable income of residents amounted to 10,931 yuan ($1,760) in the first half of the year, an increase of 7.6 percent in real terms, very close to last year's 8 percent. This shows that income growth surpassed economic growth and remains robust. Increasing residents' incomes can boost consumer confidence and lay a solid foundation for future consumption, a crucial economic engine.
The third positive sign is the continued improvement in economic restructuring. The service industry's weight in GDP rose to an all-time high of 49.5 percent, while energy use per unit of GDP decreased further in the first half, with clean energy consumption accounting for 17.1 percent of the total, and rising by 1.6 percentage points. These figures indicate that the goal of trading economic growth for quality has worked, which bodes well for sustainability.
However, there are still a lot of voices questioning the momentum of China's GDP growth. One view that is popular in the international community is that China's second-quarter GDP was bolstered mostly by an active stock market. Now that investors will take a cautious approach toward investing in stocks, which will result in a cooler market, challenges for the Chinese economy in the second half of the year are even bigger. There were reports claiming that China's second-quarter GDP would have grown only 6 percent if the securities industry's contribution were deducted.
To be fair, this view has some basis, with the financial industry being indeed the largest contributor to economic growth in the first half of the year. According to the National Bureau of Statistics, growth of the industry hit 17.4 percent, compared with 10.2 percent in 2014. In particular, revenue in the securities sector grew 400 percent in the first six months of the year, boosting the country's GDP.
Although the contribution of the stock market to the economy was significant in the second quarter, it is too premature to conclude that a less active stock market would herald slower economic growth.
Capital is fluid. Once the stock market cools down, capital will flow to other industries such as the property market. Even if capital flows back to banks as deposits, it will ultimately go to industries in the form of bank loans. Therefore, a large part of the negative effect of a slow stock market is likely to be offset by an upside in other industries. The migration of capital from shares to property surfaced in June, with the number of transactions and the average property price both witnessing an upward trend. In this sense, the stock market's loss can be other markets' gain, so there is no need to worry about a slackening securities industry.
Putting the financial industry aside, the "real economy" industries-manufacturing and service industries alike-have shown signs of bottoming out by the end of the second quarter. They offer the biggest hope for the second half.
In June, added value of industry grew by 6.8 percent, a strong rebound from 6.1 percent in May, 5.9 in April and 5.6 in March. It points to continued recovery.
Fixed-asset investment increased by 11.4 percent, up from May's 9.9 percent, while retail sales of consumer goods jumped 10.6 percent in June, beating May's 10.1 percent and coming in as the second-best monthly performance of this year.
In June, the Purchasing Managers Index, a gauge of activity in the manufacturing sector, stood at 50.2 percent, the fourth consecutive month the index has stayed above 50, which indicated continued expansion.
Foreign trade also improved in June. Exports experienced the first monthly growth this year with an increase of 2.8 percent. Although total foreign trade continued to decline, by 6.1 percent, the rate was much narrower when compared with the previous month's 17.7 percent.
Recovery in one or two economic indicators may be incidental, but the recovery in all the major economic data reveals a common trend. That is, the economy is indeed recovering from its lowest level.
Looking ahead, there is more positive news on the horizon.
To come first is the boost from previous pro-growth measures. In the first half of the year, the government rolled out quite aggressive fiscal and monetary measures to spur the economy. On the fiscal front, the central government granted quotas for local governments to increase bond issuance and allowed bonds-for-debt swaps. It also approved many large infrastructure projects. In the railway, urban rail and airport industries alone, more than 800 billion yuan ($128.8 billion) worth of projects were given the green light. As these bonds/debt are spent and those projects advance, their boost to the economy will become visible in the second half.
On the monetary front, the People's Bank of China lowered the interest rates three times and reduced the required reserve ratios five times, helping inject liquidity into the capital market. Usually it takes three to six months for monetary policies to show effect. As such, it is reasonable to expect monetary loosening measures to translate into real economic growth beginning in July.
Additionally, from a technical perspective, China's economy is not as bad as some imagine. This is because the GDP figures usually record businesses above a designated size more accurately. But when it comes to small businesses, especially e-commerce businesses, their performance is not completely reflected in the statistics. For example, online sales of the retail industry may be higher than reported, given that a lot of e-transactions through P2P channels are not recorded.
Despite all the positive signs, there are still uncertainties facing the Chinese economy. Most notably, a slow recovery of the global economy remains the biggest challenge.
As China struggles in a transition from a big exporter to a big consumer, its economic growth still relies on foreign trade. Since consumption and investment have not made up for the loss of net exports, the Chinese economy will stand on solid turf only after net export growth comes back into a positive zone, which very much depends on how global demand recovers.
The author, Zhou Feng, is a Shanghai-based financial analyst.
