China’s Economy Is Stabilizing, Headwinds Lessen

China’s Economy Is Stabilizing, Headwinds Lessen

$MCO, $JPM

As industrial profits decline, factory activity retreats and the stock market corrects, China’s economic future seems a bit blurred to some.

But, positive changes in the fundamentals can not be ignored and are helping the economy on its path of stabilizing, analysts say.

China’s economy expanded 7% in Q-2 of Y 2015, the same as in Q-1.

Latest statistics show profits at major Chinese industrial firms dropped in June and an indicator on manufacturing activities fell in July to the lowest mark since last April.

The volatility in the country’s stock market adds to uncertainties.

The benchmark Shanghai Composite Index recorded the sharpest daily drop since 27 February 2007, an 8.48% dive last Monday.

Despite that correcting stock market activity, an official with the country’s top economic planner said the fundamentals of China’s economy are stabilizing and improving.

Industrial output has continued to recover, new types of businesses have flourished, and the service sector has become an increasing contributor to the national growth, said Li Yunqing, an official at economic operation department of the National Development and Reform Commission.

Surpassing market anticipation, China’s industrial output climbed by 6.8% from a year ago for a 3rd straight month of increases in June.

“If we look at the structure of the economy and the quality of growth, the results are more encouraging,” Li said.

For example, 6 major energy-intensive industries, such as steel and building materials, slowed down significantly in 1-H, actually mitigating some growth of emerging industries, he said.

High-tech industries’ output rose 10.5 percent year on year in the first half, with industrial robots surging 130 percent and railway locomotives jumping 91 percent.

While fixed-asset investment continued to soften, its structure is shifting to consumption-linked and emerging industries.

Six major energy-intensive industries recorded a total investment growth of 7.5% Y-Y in 1-H, 2.2 percentage points below the overall investment in manufacturing.

Meanwhile, industries like computer and telecommunications equipment, information and software, transport, postal service, cultural and sports goods all posted an investment growth above 20% Y-Y.

Property investment, the old pillar of investment and growth, is also expected to recover in the second half, with house sales warming up. Fewer cities saw new home prices drop for the fourth consecutive month in June.

The pressure on home prices will continue to ease gradually through Y 2015, global rating agency Moody’s (NYSE:MCO) said in a research note.

The trend that China’s economy is stabilizing has become more obvious, Jia Kang, a renowned fiscal science researcher at the Ministry of Finance, and his fellow researchers wrote in an article published Wednesday.

As interest rates come down and monetary supply increases, Chinese companies will see the cost of investment brought down effectively and the nation’s fixed-asset investment growth will hopefully rebound in the 4th quarter, according to the article.

Retail growth has basically touched the bottom and will keep stable throughout the year, Jia predicted.

Foreign trade, another growth engine, is likely to return to growth in 2-H as global demand improves and de-stocking by companies winds down, he wrote.

China’s economy grew 7% Y-Y in Q-2 of this year, as in Q-1.

Zhu Haibin, chief economist of J.P. Morgan China (NYSE:JPM), attributed growth in the 2nd Quarter to the service sector’s performance. Consumption accounted for 60% of economic growth in 1-H, 5.7 percentage points higher than a year ago and almost 2X the contribution from investment.

“The economic re-balancing from investment to consumption is really happening,” Zhu said in a research note, predicting the economy will continue to pick up in the third quarter.

However, the degree and duration of recovery is challenged by several factors, including hovering industrial overcapacity, long-standing fiscal restraints, and the latest stock market turmoil, according to Zhu.

Stock price corrections may drag down growth in the financial sector and affect some rapidly expanding industries that have benefited from previous Bullish runs, Zhu said.

Have a terrific weekend.

HeffX-LTN

Paul Ebeling

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