Jul 27 2016

Avoiding a hard landing

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As the UK swelters under a July heatwave, the rainy, dark evenings of January and February are just a distant memory. Six months ago, concerns over a China slowdown were at the top of every investor’s mind. But now those worries seem as far away as those chilly winter nights. This week, we will see if this reprieve will be as short-lived as most British summers or a longer sunny spell for one of the world’s most important economies.

Stronger-than-expected summer data out of China offers some degree of comfort for the country’s outlook amid still-elevated levels of global uncertainty – and should help reduce fears of an economic hard landing in the near term. Resilient consumption continues to underpin overall growth, pointing to further progress in economic rebalancing. However, looking ahead, we are conscious that the momentum in consumption growth may not be able to fully offset the ongoing deterioration in private and manufacturing investment.

GDP: Second quarter 2016 GDP growth stayed at 6.7 per cent – matching first-quarter numbers, but exceeding market expectations. The contribution to GDP growth from consumption rose to 73.4 per cent in the first half of 2016 from 59.9 per cent in 2015, illustrating the progress made in rebalancing the economy. We are also encouraged by the acceleration in second-quarter nominal GDP growth, to 8.4 per cent year-over-year from 7.2 per cent in the first quarter of 2016, which should bode well for corporate earnings and consumption growth.

Activity data: Most of the June activity indicators surprised on the upside, with solid readings in retail sales and industrial production. Retail sales came in at 10.6 per cent year-on-year change compared to the expected 9.9 per cent and industrial production grew 6.2 per cent - more than the expected 5.9 per cent. We are encouraged by the notable outperformance in the investment in new and services industries, such as environmental protection, health care and IT. This contrasts with the significant underperformance in traditional industries such as mining and metals.

Money and credit: credit growth rebounded in June, after the sharp slowdown in April and subdued credit activity in May. Both new renminbi loans and the new total social financing figures strengthened more than expected in June, thanks to continued strong mortgage loan demand, as well as seasonal acceleration in loan issuance at the end of the first half. M2 growth also stayed stable at 11.8 per cent year-over-year, mitigating earlier market fears about monetary tightening.

What does this mean for investors?

Developments in China can have significant spillover into market sentiment towards emerging markets, so the recent strong data should help calm one of the global risk factors that has dampened investor appetite and this should be positive for emerging market equities and debt in the near term.

As the impact of the earlier round of easing stimulus starts to fade, immediate further policy easing seems unlikely, but we expect China GDP growth to ease modestly in the second half of 2016. The People’s Bank of China will probably wait for a clearer picture to emerge before deciding whether further easing is needed in the latter part of the year.

Developments in China can have significant spillover into market sentiment towards emerging market. So with robust data taking heat off the Chinese economy – for now, at least – we are encouraged that the positive effect on investor appetite should benefit emerging market equities and debt in the near term. One swallow does not make a summer, but for China, it is a very good start.

Nandini Ramakrishnan is global market strategist of JP Morgan Asset Management