June CPD Newsbrief — Investment principles and risk
China’s economy slackens pace
Following year-on-year growth of 7.7% in Q4 2013, the Chinese economy expanded at a slightly slower pace in the opening stanza of 2014. This increase of 7.4% was still enough to beat consensus expectations and the Dragon economy is in good health — on the face of it.
Alongside near-target growth, core inflation stands at a comfortable 1.7% and unemployment is only 4.1%. But the last time that China experienced a lower rate of growth was in 2009, when the authorities were forced to launch an unprecedented stimulus package.
A less-than-optimistic outlook for the immediate future is provided by the most recent data in the HSBC/Markit China Purchasing Manager’s Index (PMI) series. The Manufacturing PMI was at 48 in March, implying that domestic demand for manufactured goods remains sluggish and the pace of new export orders is contracting. The Services PMI is more positive but “the overall degree of positive sentiment weakened to a seven-month low”.
The Chief Economist at HSBC, Hongbin Qu, asserts that the data is indicative of an economy that “continues to lose momentum”. And while it is true that “Beijing has introduced more reform measures which could support growth”, he thinks that “bolder actions will be required to ensure the economy regains its momentum.”
For now, the Chinese government probably has sufficient resources to deal with an immediate domestic slowdown. But in the medium term, the greatest threat to the economy is an overheating property market. There is evidence to suggest the supply of property is growing faster than demand and inventories are building. Ultimately, China is not immune from the damaging effects of a property bubble.
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