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China's economy holds up in May but slowing investment points to cooling

Off-balance-sheet lending also fell sharply in May after rising earlier in year

Reuters  |  Beijing 

China, Economy
Workers chat outside a construction site in Beijing's central business district

China's generally remained on solid footing in May, but tighter monetary policy, a cooling housing market and slowing investment reinforced views that it will gradually lose momentum in coming months.

Still, with half a year left to go, is expected to handily meet its annual 6.5 per cent economic growth target without too many bumps, good news for President Xi Jinping ahead of a major political leadership reshuffle later this year.

China's fast start to the year led the Monetary Fund on Wednesday to raise its 2017 growth outlook for the country to 6.7 per cent from its 6.6 per cent forecast in April, though it recommended accelerate reforms and rein in credit.

Credit and money supply data on Wednesday showed may be making progress in the battle against risky lending and rising leverage as May bank loans topped expectations but money supply grew at the slowest annual rate in over 20 years, which the central bank attributed to deleveraging.

Off-balance-sheet lending, or shadow banking activity, also fell sharply in May after rising earlier in the year.

But the People's Bank of (PBOC) said it will balance deleveraging with the need to keep liquidity basically stable, adding that slower money supply expansion could be a "new normal".

Slower fixed asset investment growth in May and a sharp deceleration in housing starts seen in data on Wednesday point to some of the cooling economists have been expecting, though stable growth in factory output and retail sales, along with a pickup in exports, are cushioning the impact so far.

But a rise in inventories in the industrial sector and weaker producer price inflation will drag on growth ahead, said Louis Kuijs, head of Asia economics at Oxford Economics in Hong Kong.

"The first half of this year was a very happy period for in the sense that we had that wonderful increase in output prices," said Kuijs, referring in part to a construction boom which boosted demand and profits of structurally unhealthy sectors such as steel.

After rolling out a slew of measures early in 2017 ranging from short-term interest rate increases to a clampdown on riskier forms of lending and shadow banking, authorities have appeared to pause in recent weeks as the government looks to ensure political and financial market stability before a Communist Party Congress in autumn.

With slower nominal growth going into next year, "the willingness to tighten significantly (further) on the monetary side will be pretty low", Kuijs said.


Industrial output grew at a steady 6.5 per cent pace in May from a year earlier, defying expectations for a slight softening, as a government infrastructure spree continues to boost demand for building materials from cement to steel.

But rising inventories are a risk. In April, growth in industrial inventories picked up to over 10 per cent.

Weaker growth in fixed asset investment — at 8.6 per cent for January through May — was led by a slowdown in the property sector.

While housing sales rose by an unexpectedly solid 10 per cent, growth in new construction starts almost halved to 5.2 per cent in May, according to Reuters calculations.

Analysts expect the housing market to continue to slow, as the government remains wary of still-rising home prices and has maintained strict controls on home purchases and property financing.

Infrastructure spending, a key lever for the government to stabilise growth in the face of any slowdown, slowed to 20.9 per cent growth over the first five months of the year.

Growth of private investment slowed slightly to 6.8 per cent in January-May, suggesting a slight weakening of the private sector's appetite to invest as small- and medium-sized private firms still face challenges in accessing financing and now rising funding costs.

Retail spending was more upbeat, rising 10.7 per cent from a year earlier, unchanged from April and beating analysts' expectations for a decline despite the first back-to-back drop in auto sales since 2015.


Economists at Nomura forecast China's will grow an annual 6.8 per cent in the second quarter, only marginally less than the 6.9 per cent in the first quarter and providing enough momentum to coast to the government's full-year target even if there is some second-half softening.

Fund managers surveyed by BofA said China's credit tightening ranked as the top tail risk for financial markets for the second month in a row in June, with nearly two-thirds of respondents saying it will slow Chinese business activity but have little impact on global growth.

Sources told Reuters on Wednesday that China's central bank was checking with lenders in Shanghai to see if tighter rules were having an impact on lending or credit quality. Funding costs are rising slowly and banks have been raising mortgage rates.

Still, many analysts say concerns over tighter policy are overblown as measures so far this year have been on the edges and only target financial speculation, not activity in the real

Despite some tightening, "broader liquidity conditions such as M2 growth, loan growth or the growth of outstanding financing are still largely stable," said Nomura chief economist Yang Zhao.

"Further tightening should be very limited. I don't see the People's Bank of (PBOC) easing liquidity or monetary policy anytime soon, but the probably would not further tighten."