Via Capital Economics:
Our China Activity Proxy (CAP) shows that growth in China remained strong in Q2, although our new seasonally-adjusted data point to a marked slowdown in momentum since the start of the year.
The CAP is our attempt to track the pace of growth in China without relying on the official GDP figures. It is based on a set of low-profile indicators chosen to reflect activity across a wide section of the economy. (Details available on request.)
The CAP suggests that, after a sharp rebound last year, the economy expanded at a pace not far short of that shown on the official GDP figures over the last two quarters. On a monthly basis, we estimate that growth edged down in June to 6.4% y/y from 6.6% in May. For Q2 as a whole though, our CAP shows output expanded at the same pace as in the first quarter (6.4% y/y) and only slightly below GDP growth of 6.9%. (See Chart 1.)
But momentum does appear to be slowing. We have recently made improvements to our seasonal adjustment process and starting this month will be publishing our seasonally-adjusted estimates for growth alongside the y/y figures. In 3m/3m annualised terms, which are a better indicator of economic momentum than the y/y figures, growth has slowed since the end of last year. (See Chart 2 & Table overleaf.)
In particular, growth in electricity output (a proxy for activity in heavy industry) has fallen sharply in recent months in 3m/3m terms and stalled in June. (See Chart 3.) In y/y terms, growth remains rapid. But with base effects set to turn less favourable, this pace will not be sustained. External demand also appears to have weakened slightly. The volume of sea cargo moving through China’s ports slowed in June in both y/y and 3m/3m terms. (See Chart 4.)
The rest of the domestic economy has held up well. Although growth in passenger traffic fell in June in y/y terms, this was probably due to base effects caused by the shift in the timing of Dragon Boat Festival from June last year to May this year. On a 3m/3m basis, growth actually rose to a five-month high. (See Chart 5.)
Meanwhile, domestic freight volumes (a broad measure of economic activity) accelerated in June. (See Chart 6.) Property construction growth has been broadly stable over the past year, but also edged up last month. (See Chart 7.)
Looking ahead, this strength seems unlikely to last. Economic growth in China is above what we estimate can be sustained over the medium term (4.5-5.0%). And as policy support continues to be withdrawn in coming months, we expect growth to slow soon.
Indeed, official efforts to contain financial risks have already driven a slowdown in credit growth, which will weigh on economic growth the second half of this year. While we don’t expect further increases in interbank interest rates, the National Financial Work Conference that concluded earlier this month has signalled that regulatory tightening on non-bank credit will probably continue for some time yet.
I agree but expect it to be gradual.