China: Downside risks to growth have diminished - Danske Bank

Analysts from Danske Bank explained that the Chinese economy has been more resilient than expected. They still expect softer activity ahead. 

Key Quotes: 

“China has proven more resilient than expected over the past couple of months. The housing market is holding up still despite tightening measures and PMI manufacturing suggests that growth may have rebounded a bit again towards the end of Q2.”

“Another sign of rebounding Chinese activity lately is a turnaround in commodity prices. After trading moderately lower during spring, metal prices have moved higher in June and July to a new high for this year. Oil prices have also pushed higher from USD45 per barrel in mid-June to just below USD53 per barrel.”

“ What is behind the resilience? Most of our leading indicators had pointed to a Chinese slowdown, so what is behind the rebound? One explanation may be a lift to infrastructure and construction projects ahead of the 19th National Congress of the Communist Party of China, taking place this autumn. It is striking in the PMI data for the past few months that it is the large enterprises that have rebounded, while PMIs for small and medium-sized companies have weakened. The latter are more exposed to the shadow banking sector, which has seen significant regulatory tightening this year.”

“Looking ahead, we continue to look for softer Chinese activity, as credit has been tightened and projects to boost growth ahead of the congress will fade again. We expect the housing market to slow soon in response to the tightening measures. However, the downside risks to Chinese growth have diminished over the past one to two months.”