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ECONOMY: Monthly Economy Report
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July Economy Report

By Andrew Smith

BT 201607 040 05 Economy 金融市场Over the last month the Chinese economy has continued to see persistent sluggishness of certain key sectors and slowing down of the broad economy as a whole. It was not all bad news. According to the most recent data obtained from the National Bureau of Statistics, Industrial production rose 6 percent from a year earlier in May, matching economists' estimates. Moreover, retail sales climbed up by 10 percent last month, while fixed-asset investment increased by 9.6 percent in the first five months of 2016 -- missing all 38 economist forecasts and the slowest pace since 2000. Combined with improving imports and moderating factory-gate deflation last month, the data suggests that policy makers have underpinned the near-term outlook with monetary stimulus and fiscal support, even as restructuring initiatives in some industries start to bite.

In other areas however it has been pretty much more of the same. One of the relatively bright spots of the economy, the all-important housing market, which drives a third of the economy when counting impacts on ancillary industries, has started to look healthier in the last couple of months but there are still some worrying signs. Housing sales and new starts grew in May, but at a reduced pace compared with previous months. The recent recovery of the property market, which has been largely driven by looser lending, may be showing signs of turning over as local governments clamp down on overheated markets. The People's Bank of China (PBoC) has not cut interest rates since October, nor has it reduced banks' reserve requirement ratio since February.

BT 201607 030 01 Economy 6608733 145357715000 2In terms of the fiscal part of the equation, growth in central government spending has been somewhat subdued, up 12% through April compared with a year earlier, but slower than the 20%-plus growth in the second half of last year. What is more, a local government bond-swap program was less active in May than previous months. Not having made any overt easing moves in recent months has left policy makers with several options to choose from. The trouble is, with debt and overcapacity high, all these choices face diminishing returns compared to past years. At this point the best outcome that investors can hope for is a Chinese economy that continues to slow slowly. But even that may be asking too much.

The debt situation also continues to provide cause for concern. Until recently most of the focus has been on high levels of public credit that is sitting on the balance sheets of many key regions. However financial commentators are increasingly paying attention to corporate debt as it is becoming ever more apparent that the absence of high growth in key industrial sectors is affecting company's abilities to fulfil their borrowing obligations. Last week the IMF sounded the alarm bells, saying that the corporate debt situation in China has the potential to turn sour and impact the broader economy in a significant way.

BT 201607 040 02 Economy 6608733 145357715000 2"Corporate debt remains a serious - and growing - problem that must be addressed immediately and with a commitment to serious reforms," said David Lipton, the IMF's number two and the leader of its latest mission, which ends on Tuesday. During his speech in Shenzhen, Mr Lipton pointed to the potential risk to the global economy. "We have learned over and over in the past 20 years how disruptions in one country's economy and markets can reverberate worldwide," he said, citing the global "spillovers" from last year's turmoil in Chinese markets. Lipton warned that efforts to address China's corporate debt load - which at 145 per cent of GDP was "very high by any measure" - had seen only "limited progress".

One of the big talking points this month has been the high stakes meeting between German Chancellor Angela Merkel and Chinese Premier Li Keqiang. The two nations, which are the world's second and fourth largest economies, have seen a substantial growth in trade over the last decade and have engaged in a wide variety of public and private strategic cooperation that is aimed at boosting economic growth for both sides. China's ability to maintain a good working relationship with Germany is also crucial because Mrs Merkel and her administration are of course the most influential members of the European Union, the Middle Kingdom's largest export market.

BT 201607 030 04 Economy hlDuring the conference there was a lot of discussion about potential tensions between China and the EU over trade matters. In recent months there have been widespread fears within the European country's heavy industries that if China is granted market economy status by the World Trade Organisation the EU will be flooded with cheap subsidised products that will do massive amounts of damage to domestic manufacturers. Merkel has long said that she widely supports the switching of trade status, as long as China also fulfils its promise to open the country up for increased foreign investment and reduces the amount of capital controls that overshadow the country's financial markets. Nevertheless, the Chinese Premier sought to ease any concerns about the new trade deal leading to chaos. "China has already fulfilled its obligations on joining the WTO. What is needed now is for the other parties to fulfil the matching obligations they had promised," Premier Li Keqiang told reporters in Beijing on Monday alongside the German leader. "We don't want to fight a trade war because this will benefit nobody," he said, echoing a similar comment Merkel made on Sunday.

The broader international picture is going to be crucial for China in the latter half of the year, particularly if the recent turbulence in global financial markets persist. Although it is yet to be seen whether a so-called 'Brexit', a Donald Trump presidency and implementation of China's new economic strategy will be beneficial to the global economy in the long run, the reality of these outcomes happening and turning sour is making people run away from risky asset classes and is making the probability of big market corrections all the more higher. Given how fragile China's financial markets have already been in the last couple of years and how slow exports have been, the importance of investor sentiment across the entire global financial sector cannot be understated.


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