July indicators show signs of economic stabilization of China

China recently reported stronger- than-estimated economic indicators in July, highlighted by fixed asset investment (FAI). industrial production (IP) and export growth. Financial institutions home and abroad believed this should lead to stronger GDP growth in the third quarter while alleviating some market concerns over slowing economic momentum.

According to the latest figures released by the National Bureau of Statistics, the growth rate of FAI in July picked up slightly while IP rebounded significantly to 9.7 percent from 9.1 percent in the second quarter.

China Economics Update published by China Construction Bank (CCB) said the growth of FAI was mainly because of broad infrastructure and stronger property investment in the month. The visible rise of IP was due to acceleration in electricity production, ferrous metal refining and auto production.

Besides, export grew 5.1 percent year on year in July. CCB believed it was largely because of the low base in the third quarter last year, though the recovery in consumption demand in the United States and Europe provided a boost to labor-intensive product exports.

Import also recorded an increase of nearly 11 percent, "driven by higher commodity imports once upstream sectors began to re-inventory following the rebound in domestic FAI-related demand," said the bank.

ECONOMIC STABILIZATION

HSBC Co-head of Asian Economics Research Frederic Neumann said those numbers suggest that "a degree of stabilization is setting in," adding that "this, if sustained, along with more positive news from advanced markets, should help curtail risks to emerging Asia over the coming quarters."

Neumann believed accelerating industrial production, recovering trade and stabilizing investment can be attributed to reassurances and policy fine-tuning by the central government.

In recent weeks, Chinese central authorities offered soothing words, with Premier Li Keqiang reiterating his growth target of 7.5 percent for this year. "More concretely, the government announced various measures to spur demand. Investment in railways has picked up, taxes on small and medium enterprises and services are being cut, and the approval process for certain investments has been simplified," Neumann continued.

In the latest report of China Economic Watch by Merrill Lynch, a bright spot of the overall economy is forecast for the near future. According to its prediction, GDP growth in the second half of the year will very likely be stable while (Consumer Price Index) CPI inflation might stay below 3 percent in August and September.

"With all these favorable factors, the economy and markets could be in a bright spot from August to Mid-October. After that, markets could see growth moderate, and CPI inflation break the psychological 3 percent threshold," said the report.

RISKS REMAIN

Above all the good signs there are risks lying ahead. According to Merrill Lynch's analysis, the growth rebound won't be "long-lived" since "China's growth is on a structural downward trend, so a cyclical rally could be quickly met with a structural force of slowdown."

Another reason would be that people were pessimistic in June due to the excessive anxiety in the interbank market. In July, with concerns relieved thanks to Premier Li's intervention and an ensuing vow to deliver stable growth, "there was a pent-up demand for everything as confidence was regained. However, pent-up demand won't last long."

In Neumann's view, it's worth to keep an eye on Chinese property market. According to official data, property transactions by value fell 17 percent in July, although it is difficult to say whether this reflects deliberate curbs, seasonality, or lasting financial constraints.

"Aggregate credit growth continues to cool from its torrid pace earlier in the year, but the impact on demand, and real estate, remains uncertain," he said.