China reported 6.9 percent economic growth YoY for 2Q17, which was on par with that achieved in 1Q17. Their exports advanced 9.4 percent YoY amid the current global recovery. China's domestic economic sectors, however, weakened, in particular, fixed asset investments that grew at a slower pace of 8.6 percent (YoY, YTD).
One leading economic indicator, the manufacturing PMI, shows that the raw material inventory and finished goods inventory sub-index is still below 50 (representing a contraction), while the employment sub-index slipped below 50 for the first time during 2Q17, suggesting that their domestic economy is relatively fragile. This, coupled with an expected decline in exports over the remainder of 2017, leads KResearch to believe that the 2H17 Chinese economy will likely cool further from 1H17. However, we revised upward our 2017 performance forecast for the Chinese economy in April to 6.7 percent growth, against 6.5 percent before, given the surprising improvements seen in 1H17.
The better economic growth in 1H17 may leave room for China to tackle structural problems. According to the guidelines adopted at their 5th National Financial Work Conference, July 14-16, China signaled an intent to put systematic financial risk supervision forward as a national agenda. Looking ahead, KResearch is also of the view that China may try to maintain demand-supply balance in their property market to prevent a bubble, as well.
Meanwhile, the Chinese economy may continue to face an unbalanced resource allocation problem because corporate debt – largely from inefficient traditional state-owned enterprises – will likely inhibit economic growth during the transition period. This presents a medium-term systematic risk that should not be overlooked. Therefore, close attention must be paid to how seriously their government addresses this issue.
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