The latest economic data from China show GDP growth is likely to be decelerating. After peaking at 6.9% in the first quarter, it should gradually approach the official 2017 target of 6.5%.
Year-on-year growth in industrial production declined from 7.6% in March to 6.5% in April, while fixed asset investment edged downward from 9.2% in March to 8.9% in April. Annual growth in retail sales eased as well, going from 10.9% in March to 10.7% in April.
The property sector, one of the pillars of the recovery in GDP growth and a major component of the Chinese economy, is showing some signs of cooling. This is most likely the result of prudential measures taken by a number of cities in an effort to reduce the risks of overheating. The pace of new construction has declined slightly, going from 18% year over year in March to 17.5% in April, while growth in housing sales decelerated from 16.9% to 13%.
Over the past three months, the number of Chinese cities applying restrictions has doubled. Buoyed by relatively low interest rates, mortgage lending has shown robust growth – around 35% over the past 12 months. The People’s Bank of China (PBoC) clearly prefers to keeps its benchmark rates unchanged to avoid destabilising a debt-laden economy, and mortgage rates have stayed relatively low and stable as a result. In line with its monetary policy over the past few months, the PBoC should continue to gradually raise certain market interest rates as a way of influencing interbank liquidity and, in turn, commercial banks’ lending activities. The prudential measures put in place by Chinese cities are likely to be strengthened in a further bid to normalise the property market. It is not yet clear whether these measures will keep prices in check, as we explained in our Macro Highlights of 24 April. If property prices remain overheated, the resulting rise in rents would lead to inflationary pressure. This scenario would force the PBoC to raise its benchmark rates and risk destabilising the Chinese economy.
A second risk factor relates to the Chinese banking authorities’ intention to contain financial risks by limiting growth in informal lending. These efforts would reduce available interbank liquidity and push up interbank lending costs. Small banks – which often rely on the interbank market and informal lending to fund their own, sometimes riskier, lending activities – would be at greater risk. The initial effects of the more restrictive stance on informal, non-bank lending can be seen in aggregate financing, which contracted sharply in April to CNY 1,390 billion versus CNY 2,120 billion one month earlier. These tensions on available liquidity could push up the default rate in China, especially in the banking sector, and nudge bond yields upward as well.