China’s coming back

From the July 2016 issue.

After a rocky start to 2016, the Chinese economy recently seemed back on track for growth beyond the magical six per cent mark. But with increasing pressure to reduce its debt burden, it may not be out of the woods just yet.

The Wall Street Journal’s Alex Frangos hit the nail on the head in early June when he wrote that “the worry with China” was that it might be time to start worrying again. The noise around the Chinese economy after the January stock market crash had only just yielded when Frangos penned his trenchant analysis, but a trove of new economic data was already underway that would go on to paint a picture of an economy slowly moving sideways again, if not sputtering.

“Signs of meaningful improvement China bulls seized on a couple of months ago are harder to find,” the Hong Kong-based journalist wrote – indicating that there is still ample scepticism in the market as to whether the People’s Republic has a viable strategy in place to perform in an increasingly fragile world economy. After all, issues within the world’s second
largest economy can easily crimp global growth, a big concern at a time when weak oil
prices and geopolitical concerns are also clouding the outlook.

“The brief bounce in the industrial parts of the economy that excited commodities markets is [already] fading again,” Frangos followed up, with yet another set of economic data released by authorities in mid-June augmenting his worry: It found that the pace of Chinese investment growth slowed sharply in the first five months of 2016, blunting a recent rally in the traditional sectors and renewing uncertainty over China’s future outlook.

To many analysts’ concern, the rate of fixed asset investment growth fell to 9.5 per cent, the slowest in 16 years and well below economist forecasts of 10.5 per cent. Even more prominently, fixed asset investment growth from the private sector was just 3.9 per cent, compared to 22.3 per cent growth from the state sector – likely reflecting waning confidence in Chinese businesses as well as casting doubt over the government’s ability to rein in debt-fuelled stimulus, particularly if it is to reach its 6.5 per cent GDP growth target for 2016.

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