China: Infrastructure is back, but not the old days – ING

Iris Pang, Economist at ING explains that to balance lower property construction activity, China will build more infrastructure, but this is not a return to the old model.

Key Quotes

“Fixed asset investment (FAI) will grow steadily in August from last month (INGF: 8.2% YoY YTD; consensus: 8.2%; prior: 8.3%). As of July YTD 2017, manufacturing accounts, real estate and infrastructure accounted for 31%, 23% and 21% respectively of FAI. However, infrastructure investment has been the main growth driver (20%YoY) while the other two grew at single digits only.”

“This raises the alert of whether China is going back to its old model of an investment driven economy, especially after the higher PPI data released a few days ago.”

“It could be, but along with new growth areas, such as consumer spending and production of high tech products.”

“Retail sales have grown faster than investment, and we expect this trend to continue. That said, sales will likely grow at a more subdued pace in July (INGF: 10.1% YoY; consensus: 10.5%; prior: 10.4%) due to slower consumption of jewels nearer the time of the 19th Politburo. In contrast, spending on services shows an accelerating trend. Spending on catering, sport-related activities and inbound tourism related activities in 1H17 rose 11%, 25% and 16%-21%, respectively.”

“Industrial production should confirm that China is not returning to the old model (INGF: 6.2% YoY; consensus: 6.6%; prior: 6.4%). With the clean-up of overcapacity ongoing, overall manufacturing growth should decelerate. But high techs are faring better. New energy cars, integrated circuits and industrial robots are currently growing at 19.8%YoY, 23.7%, and 57%, respectively.”

“As fundamentals consolidate, GDP growth should reach 6.8% in 2017. This would give room for the PBoC to deleverage the financial sector. Interest rate rises should follow. (INGF: 3M SHIBOR 4.5000% end of 2017 from 4.3768% on 12 Sep 2017). That paves the way for a strong CNY (INGF: USDCNY 6.40 end of 2017 from 6.53 on 12 Sep 2017).”