China's Growth Prospects Continue To Be Murky For 2 Reasons

Earlier today, China released a bunch of fresh economic data, and most of it was encouraging.

One of the important highlights was industrial production, which jumped 9.7% year-over-year in July. Economists were expecting a 8.9% gain.

Economists will now likely have to revise up their forecasts for Q3 growth.

However China is by no means in the clear.

Here’s Societe Generale’s Wei Yao:

…we still believe the growth outlook beyond Q3 is murky for two reasons. First, property sales growth peaked in April and has since started to fall. Sales value growth slowed to 14.6% yoy from 17.7% yoy in June and 46% yoy in H1. Renewed emphasis on affordable housing projects and improving funding access of big developers may support the construction revival, but sales remain the dominating factor of the housing investment cycle.

Second, overall credit growth is declining, which should limit the increase in fixed asset investment. According the People’s Bank of China, M2 growth unexpectedly re- accelerated to 14.5%yoy in July from 14%yoy, but credit nonetheless grew more slowly. New yuan loans decreased by CNY160 bn to CNY 700bn (Cons. 640bn; SG 650bn). More importantly, credit from non-bank channels — shadow and bond — fell to just CNY109 bn from CNY177 bn in June and CNY 516.6bn in May. Undiscounted banker’s acceptance bills contracted for a third month in row and net issuance of corporate bond only increased by a paltry 5bn from the extremely depressed level in June to CNY46 bn. As a result, total credit growth, according to our count, slid to 20.7% yoy from 21.3% yoy in the previous month and compared with 23% yoy back in April. The implication of the latest money and credit data is that liquidity is returning to the formal banking system, but conditions keeps tensing up elsewhere.

Yao has long been concerned about the state of China’s credit bubble and its ability to generate growth.

“We maintain our view that liquidity tensions in the shadow banking system and the bond market will remain in place, as the PBoC is keen to contain excess credit growth,” said Yao. “This remains the biggest risk factor to economic growth beyond Q3.”

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