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A batch of July economic indicators are announced today, together with the previously released trade and credit data, suggesting that the growth further decelerated amid the escalation of US-China trade war and the domestic structural obstacles such as debt overhang and financial risks.
The recent sharp depreciation of the RMB is unlikely to lead to financial turmoil like in 2015: the authorities kept the currency’s pricing mechanism intact and have accumulated valuable experience over the past few years; moreover, the PBoC still maintain a tight grip of the country’s capital account.
Last week China’s government announced its GDP figures in the second quarter as well as a batch of activities indicators in June such as industrial production, retail sales and fix-asset investment. These headline figures still look fine.
The better-than-expected economic growth in the first half of 2019 seems transitory. The renewed trade war with the US in Q2 is likely to exert adverse effects on China’s economy over the medium-long term. Moreover, a number of domestic structural factors will continue to weigh on the growth.
The Q2 GDP growth came at 6.2% y/y (versus 6.4% y/y in Q1), in line with market consensus. Growth slowdown in Q2 is widely expected amid the unsettled trade war with the US and the domestic structural obstacles such as debt overhang and financial risks.
Recently, the surplus of the current account also narrowed significantly. Looking ahead, a combination of “current account deficit” and “capital account two-way fluctuation” could become a “new normal” for China’s Balance of Payments (BoP).
Although the non-performing loan ratio remained stable and the capital adequacy ratio still sufficient to meet financial needs, there is a diverging trend between large and small commercial banks. Some small banks are subject to capital shortfall amid deteriorating asset quality and persistent regulations on shadow banking.
A batch of May economic indicators are announced today, together with previously released trade and credit data, suggesting that the risk of growth deceleration looms large as US-China trade war remain unsettled. We anticipate more monetary and fiscal easing measures to be deployed to sustain growth momentum.