While the world has been infatuated with the increasingly wild gyrations in China’s stock market, Capital Economics, like others, don’t believe it’s reflective of the outlook for China’s economy in the second half of the year.
Indeed, with credit growth, fiscal spending and exports all tipped to accelerate, the group believes that economic growth will likely hold up in the months ahead.
On the subject of the stock market, something that imploded spectacularly in mid-June after a huge run-up in the previous eight months, Capital Economics believe the decline has seen sentiment towards the economy become far more pessimistic, overshadowing an improvement in economic data seen in June.
Here’s why they’re not worried about the impact of the recent selloff in China’s stock market when it comes to economic growth.
“We believe that the fall in equity prices is simply the collapse of a bubble, rather than a reflection of deteriorating prospects for the economy. We also believe that spillover from the bubble’s collapse to the wider economy will be limited. Owners of equities are relatively few in number (roughly one in 30 Chinese) and wealthy. The equity market has never been an important channel for corporate fundraising”.
Excluding the terrible flash manufacturing PMI gauge for July released earlier this month, as the group’s China Activity Proxy shows below, growth appears to be accelerating at present, albeit from levels significantly below the 7% official growth rate reported for the June quarter.
Along with the improvement in economic data seen last month, the group believe that an acceleration in credit growth, government spending and exports in the second half of the year will “prevent growth from slipping further”.
Looking ahead the group believes economic data for July – beginning with the government’s manufacturing PMI gauge tomorrow – will be “broadly upbeat”.
“Trade growth is likely to have slowed again, although only temporarily. But we think that growth in credit, fixed investment and industrial output will all have accelerated on the back of recent policy easing. In addition, consumer price inflation looks to have picked up sharply, which should help ease lingering concerns about deflation”.
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