China’s second quarter GDP highlights
China’s GDP increased 6.7% in the second quarter, which was in line with Q1’s result and came in slightly above the 6.6% expansion that market analysts had expected. Sequential data showed that GDP in the second quarter adjusted for seasonal factors increased 1.8%. This result was up from the 1.2% expansion witnessed in Q1. Nominal GDP was reported to surge 8.4% in Q2 against the 7.2% rise seen in the first quarter. With policy stimulus unveiled at the end of 2015, the first month of the year started with fade rate and now growth appeared to be moderated slightly in Q2. Export remained weak due to subdued global demand while Yuan is under pressure due to Brexit and uncertainty about the US monetary policies. The government is attempting to steer the economy away from investment- and export-led growth, to growth based on domestic consumption. However, it is proving difficult to have more of consumer spending with Chinese households saving less. China’s economy is more poised to the risk on account of worsening external factors amid the Brexit shake-up and rising geopolitical tensions worldwide and poor investment from private sectors. Chinese government has set a GDP growth target between 6.5% – 7% for 2016 and 6.2% for 2017.
China’s GDP Growth (Source: Financial Times)
The Q2 performance can be attributed to the following:
Support from government: Support from Chinese government prompted economy to stabilize in Q2 as government investment remained strong in April-June period while activity in industrial sector accelerated. On the other hand, the quality of growth observed in second quarter of 2016 is poor as it is mainly supported by traditional government-led sectors and cheap credit.
Investment in real estate all time low in May: The main feature what we see is the investment hitting all-time low in May 2016. The investment in real estate sector has slowed down in May, which was has been leading the pick-up in growth in recent time. The bulk investment from state government has been seen, but the private business investment has been at all-time low. This situation signals that the public sector remains as the main source of investment growth at the expense of the private sector, thereby casting some doubts about the quality of China’s economic transition.
Recovering economic drivers: While investment slowed down, the Industrial production however expanded in June by 6.2% against May’s rise of 6%, supported by electricity, gas and water supply activities while stable growth has been observed in all-important manufacturing output.
Dynamics in private consumption broadly stable in Q2: Stability was seen in private consumption in the second quarter of FY16 post the slowdown in the first quarter due to volatile stock market. Retail sales could surge 10.2% in line with the first quarter. The rise in state investment and slowdown in private investment resulted into infrastructure and factory construction growing only 9% for first half of 2016 as against the first quarter figure of 10.7% rise.
Construction Statistics (Source: National Bureau of Statistics of China)
Drop in exports: Overseas shipment declined 3.9% in the second quarter as compared to 10.2% drop in the first quarter indicating the continued weak global demand impacting China exports. The weakening of the Yuan has played a role in the softer contraction in exports while subdued domestic demand represented a drag on imports.
Impact on Australia
Mining and energy sector in Australia have been subdued on the back of lower demand from China. The services sector is known to be the largest part of the Australian economy, with contribution of about 70% of GDP and 75% of jobs. The demand for resources was dismal but service industry has seen good growth. On the other side, the recovery hopes from China, rising inflation, Brexit outcome and Fed’s cautious stance drove the Australian dollar higher. At the backdrop of the above factors, AUDUSD surged over 7.74% in the last six months (as at July 25, 2016).
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