Dong Jinyue and Xia Le:Economic Moderation Continues

2017-06-16 IMI

This article first appeared in BBVA Research on June 14, 2017. Dong Jinyue ,BBVA Xia Le, Chief Economist for Asia, Research Department, BBVA After registering a stronger-than-expected performance in Q1, Chinese economy continued its moderation in May, reflected in a batch of important activity indicators reported today. Growth moderation is partly due to the authorities’ monetary prudence targeted at the risky shadow banking and the overheating property market. Risks from corporate and local government debt overhang, capital outflow and shadow banking still exist. Thus, we maintain our growth projection of 6.3% for 2017 (vs the official target of around 6.5%) . Growth moderation continues. FAI dropped to 8.6% ytd y/y from the previous month reading at 8.9% ytd y/y (consensus: 8.8% y/y). Private investment, which is our previous concern of the growth sustainability, also dropped from 6.9% ytd y/y previously to 6.8% ytd y/y. In addition, industrial production maintained the comparatively low growth rate of 6.5% y/y as in April (consensus: 6.4% y/y) and retail sales also remained at 10.7% y/y as of the previous month (consensus: 10.7% y/y) , reflecting the recent sluggish auto sales. Our MICA model provides a monthly GDP growth rate of 6.8% y/y in May, reflecting the recent economic moderation.

Monetary tightening effects caused by regulatory enhancement haven’t fully translated into the real economy yet. That being said, growth moderation is expected to persist in the rest of the year. Investment is likely to bear the brunt of regulatory stress as it tends to raise firms’ financing costs. Meanwhile, the improved external environment could partially offset the downtrend of investment by boosting exports and the consumption still remains steady.

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Dong Jinyue and Xia Le:Economic Moderation Continues

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