The economy is likely to face further headwinds as consumption comes under pressure from slowing income growth.
 The economy is likely to face further headwinds as consumption comes under pressure from slowing income growth.

China Economy Stumbles in Q2

The world’s second-largest economy seeks stability in the face of a darkening global outlook

China Economy Stumbles in Q2

China’s economy lost momentum in the second quarter, a survey shows, as Beijing’s efforts to curb risky lending and investment took a toll on the Asian powerhouse.
The world’s second-largest economy expanded by 6.8% in the April-June period, compared with a year ago, according to the median forecast of 12 analysts polled by AFP. That follows a better-than-expected increase of 6.9% in the first three months of the year. China seeks stability in the face of a darkening global outlook.
The estimate comes ahead of the official release on Monday of China’s closely-watched GDP growth data for the second quarter.
Debt-fuelled investment in infrastructure and real estate has underpinned China’s growth for years but warnings of a potential financial crisis have spurred Beijing to clamp down.
Tighter restrictions on property purchases and bank lending will continue to weigh on the economy in the months ahead, said Larry Hu, head of China economics at Macquarie Group. “We expect GDP growth to trend down in the second half of 2017 on slowing property sales and tight liquidity,” he said.
The economy is likely to face further headwinds as consumption also comes under pressure from slowing income growth, said Fan Zhang, senior China economist at RHB Bank.
UBS chief China economist Tao Wang said “higher funding costs due to supervisory tightening” will impact fixed-asset investment—which measures spending on real estate, roads and bridges.
But a sharp slowdown in the second half is unlikely as policymakers prepare for an important Communist Party congress later this year that will likely make President Xi Jinping the most powerful leader in a generation.
“It is therefore highly probable that authorities will use the resources and policy tools at their disposal to ensure a positive economic outcome,” Citibank said.
The government has trimmed its 2017 GDP growth target to around 6.5%, after it expanded by 6.7% in 2016—its slowest rate in more than a quarter of a century.
Despite growing concerns about China’s financial risks, Premier Li Keqiang said last month that the country could reach this year’s economic growth targets.
Last quarter’s growth momentum had continued into the current one, he said, noting that traditional economic indicators such as power generation and consumption, and new business orders had increased “significantly”.

Fitch Joins Moody's
In the latest alert, Fitch Ratings on Friday said China’s growing debt could trigger “economic and financial shocks” even as it maintained its A-plus rating with a stable outlook .
That follows Moody’s decision in May to downgrade China for the first time in almost three decades on concerns over its ballooning credit and slowing growth.
Moody's Investors Service downgraded China's long-term local currency and foreign currency issuer ratings to A1 from Aa3 and changed the outlook to stable from negative.
The downgrade reflects Moody's expectation that China's financial strength will erode somewhat over the coming years, with economy-wide debt continuing to rise as potential growth slows.
While China’s external finances were robust and near-term growth prospects “favorable”, Fitch said “large and rising debt levels” in its non-financial sector were a significant risk.
“Overall leverage in the context of continued adherence to ambitious GDP growth targets raises the potential for economic and financial shocks,” it added.
Debt-fuelled investment in infrastructure and property has underpinned China’s rapid growth, but there are widespread concerns that years of freewheeling credit could lead to a financial crisis with global implications.
Beijing has been clamping down on bank lending and real estate purchases but those efforts are complicated by the government’s determination to meet its full-year growth target of around 6.5%. That compares with last year’s pace of 6.7%, which was the slowest in around a quarter of a century.
Premier Li Keqiang said last month that China could meet the target. In a positive sign for China, capital outflows have “fallen sharply” since early this year and the current account—a key gauge of the economy’s health—remains in surplus.
But Fitch said tighter monetary conditions could lead to slower growth next year of 5.9%. “Macro-prudential regulations and tighter credit conditions will, in Fitch’s forecasts, result in a slowdown in the housing sector and investment spending,” it said.


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