World Economy

China Economic Growth Obscure

Although on the surface the markets are telling different stories about the Chinese economy, it actually faces bottlenecks
Earnings growth for China’s industrial firms cooled in July after accelerating for three straight months.Earnings growth for China’s industrial firms cooled in July after accelerating for three straight months.

China's financial markets are sending conflicting signals about the health of the world's No. 2 economy, where a strengthening currency, buoyant stocks and soaring commodities contrast with the pessimism popular among the country's bond investors.

The country's latest economic data have made the picture even murkier, with the pace of industrial output, retail and housing sales and investment growth all decelerating in July. Some economists, however, argue the weakness was temporary and due to an unusually hot summer that affected construction work, Dow Jones reported.

A closer look suggests bond investors' cautious outlook may win out. That is because the recent rally in other asset classes has come partly thanks to policies designed to preserve financial stability ahead of a key Communist Party political meeting this fall, and partly due to potentially excessive optimism about structural reforms.

"Although on the surface the markets are telling different stories about the Chinese economy, the overarching theme remains that the economy faces bottlenecks like a relatively primitive growth model and fresh drivers," said Shen Meng, director at Chanson & Co., a Beijing-based boutique investment bank.


The Chinese currency's resurgence has been one of the year's big surprises. The yuan now trades at a near one-year high and is up more than 4% against the US dollar, after dropping 6.6% last year.

Yuan's rise has some logic behind it—the dollar has been weak against a range of global currencies in recent weeks as expectations for US rate increases are pared back.

Still, some say the yuan's recent strength could also reflect Beijing's desire to reduce frictions with the new administration of President Donald Trump, who repeatedly accused China of keeping its currency artificially weak during last year's campaign.

The yuan's rise also reflects Beijing's desire to deter rapid capital outflows. The People's Bank of China sets a daily level for the yuan against the dollar and then allows it to trade in a tight 2% range either side.

Stocks and Bonds

China's stock market has also done well in the past two months. The SSE 50, a widely watched index that tracks the 50 most valuable companies listed in Shanghai—almost all of which are state-owned—has surged 16% this year to its highest level in more than two years.

While some analysts have cited signs of resuming long-stalled reforms of the country's inefficient state-run enterprises as a factor, others point to Beijing's political agenda as a more important reason for the market's bull run. Some market participants say state-backed investment funds, nicknamed the "national team", have been stepping in to prop up the market.

China's bond market is sending a more chilling message. The yield on China's 10-year government bond is now just 0.09 percentage point (nine basis points) above that on the three-year paper, giving the spread or so-called yield curve its flattest shape in three years.

"The flat yield curve does reflect caution among investors because as long as China's various reforms aren't completed, there will be uncertainties over the economy," said ING's economist Iris Pang.

Industrial Profits Cool

Earnings growth for China's industrial firms cooled in July after accelerating for three straight months, reinforcing expectations the economy will slow over coming quarters as higher lending costs and property market curbs bite, ATimes reported.

Profits earned by China's industrial companies in July rose 16.5% from a year earlier to 612.7 billion yuan ($92.16 billion), but slower than the previous month, the statistics bureau said on Sunday.

Profit growth slowed in July because some companies halted production due to especially high temperatures, He Ping of the National Bureau of Statistics bureau said in a statement along with the data release.

For the first seven months of the year, the firms notched up profits of 4.25 trillion yuan, a 21.2% jump from the same period last year and a touch slower than the 22.0% annual growth in the January-June period.

Beijing's efforts to reduce debt have pushed up lending rates, signaling tighter margins and tougher operating conditions for firms as debt servicing costs go up–a sign of slowing earnings growth ahead over the coming months.

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