China’s Rebound Will Take Longer, And Be Softer

China’s economic recovery, widely expected during the second half of this year, may take longer to materialize and will require further policy support by the Chinese government, says a research report by Standard Chartered Bank.

Economic indicators in July disappointed those who were hoping for a strong rebound. Industrial production growth moderated to 9.0% year-on-year in July from 9.2% in June, despite the pick-up in official manufacturing PMI to 51.7 from 51.0 during the same period.

Electricity production, which may be a more reliable indicator of activity, also slowed to 3.3% in July from 5.7% a month ago. Even though retail sales growth held up, at 10.4% growth in July in real terms, but fixed asset investment growth slowed to 14.8% in real terms in July from 16.8% in June. Housing fixed asset investment growth remained sluggish at 11.3% in July.

Standard Chartered now expect a difficult third quarter, but things will turn upwards in the fourth quarter.

The drag on activity coming from the housing sector is strong, and while exports are recovering, it is a slow process. Exports only account for some 10% to 15% of China’s GDP, but the housing sector and its upstream suppliers takes up 25% to 30% of GDP.

Even though credit growth has stabilized, but it will take some time to filter through to support real economic activity.

As a result, Beijing will have to push ahead with its "mini-stimulus" policies in the third quarter, in order to hit the 7.5% GDP growth target in 2014.

Standard Chartered expects more targeted reserve requirement ratio (RRR) cuts, re-lending to policy banks to support railways and social housing construction.

China Expert network