UBS House View Daily

Thought of the day

17.07 - China growth outlook

China’s strong performance in the second quarter, up 6.9% year on year, may suggest the country is heating up. On the face of it, resilient consumption, rebounding exports and solid industrial production all hint at an economy back on the expansionary track.

But the late surge in June activity data looks largely linked to temporary liquidity conditions, with policymakers set to further tighten financial system regulations and press on with deleveraging efforts:

  • The PBoC shift to “relatively high” liquidity, which surged to near 2017 highs with a USD 42bn injection in mid-June, is a temporary reaction to April–May credit crunch fears. That helped drive better-than-expected urban investment, +8.6% in June versus consensus +8.5%, while backing further consumer spending via consumption loans.
  • Regulators aren’t backing down – with President Xi this weekend calling for strengthened financial supervision, and unveiling a new high-level regulatory committee at the once-every-five-year Financial Work Conference (FWC). The FWC also mandated tighter rules on bad assets and continued deleveraging, which looks to be a major theme at the upcoming 19th Party Congress.
  • Stronger economic performance offers policymakers more room for tighter policy in the second half, in our view. This could apply across the board, from state-owned-enterprises to corporations, local governments and internet financing.

So while our overweight position in offshore Chinese equities in our Asia tactical asset allocation should be supported by today's strong growth numbers, investors should expect the pace of recent gains to slow through the second half as policy tilts back toward deleveraging.

Chart of the day

China debt-to-GDP ratio reveals deleveraging challenge ahead

China growth outlook

Source: CEIC, UBS estimates as of 17 July 2017.

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