China's economy charges on as officials target the risk 'rhino'

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(July 17): China’s economy grew faster than expected in the second quarter, putting the nation on track to meet its growth target this year and giving backing to officials in their campaign to corral oncoming financial risk.

Data showing that the world’s second-largest economy expanded 6.9 percent in the second quarter, matching the pace from the first three months, was released hours after the Communist Party’s People’s Daily newspaper warned of potential "gray rhinos" — highly probable, high-impact threats that people should see coming, but often don’t.

In China’s case it’s the relentless buildup of risks caused by the debt-fueled investment that’s contributing to growth, a development tackled by a major meeting of top leaders in Beijing at the weekend. Until now, regulators have homed in on financial-sector excesses; that probe is now widening to debt in the broader economy, a shift that prompted a sell-off in domestic stocks.

China is grappling with how to ensure annual growth of at least 6.5 percent this year while reining in financial sector risks ahead of a twice-a-decade leadership transition this fall at the 19th Communist Party Congress. A regulatory crackdown pushed up money market rates and helped damp down speculative lending while at the weekend President Xi Jinping warned regulators that failing to spot and dispose of risks in a timely manner would amount to a "dereliction of duty."

"The gray rhinos are containable," said Liu Ligang, chief China economist for Citigroup Inc. in Hong Kong. But the economy is "still relying quite a lot on investment and credit and overall financial leverage is still building up. There’s no doubt that China’s debt overhang is still a serious challenge."

The data

* Gross domestic product increased 6.9 percent in the second quarter from a year earlier, compared with a 6.8 percent median estimate in a Bloomberg survey, matching the pace of expansion in the first quarter
* Industrial output rose 7.6 percent in June from a year earlier, compared with an estimated 6.5 percent increase
* Fixed-asset investment climbed 8.6 percent in the first half of this year, versus a median forecast of 8.5 percent gain
* Retail sales jumped 11 percent from a year earlier in June, compared with a median estimate of 10.6 percent in a Bloomberg survey

While the economy steams along, the government is setting a wary tone: The front page commentary in the People’s Daily, said China should not only be alert to "black swan" risks that catch people off guard but also more obvious threats. It cited a term popularized by author Michele Wucker’s book "The Gray Rhino: How to Recognize and Act on the Obvious Dangers We Ignore."

With the economy still on a slowing-growth trend, China should "strictly prevent risks from liquidity, credit, shadow banking and abnormal capital market fluctuations, as well as insurance market and property bubbles," the commentary said. The new focus on "deleveraging in the economy" suggests that local-government and state-owned enterprise debt is now very much in the spotlight.

China’s strong momentum has fueled global economic expansion and boosted sentiment in international markets. The nation’s solid growth reinforces recoveries for commodity exporters and keeps 2017’s pickup in global growth on track, said William Adams, senior international economist at PNC Financial Services Group in Pittsburgh.

"The Fed’s commitment to a gradual pace of interest rate hikes is maintaining supportive monetary conditions for emerging-market growth," said Adams, who previously worked for the Conference Board in Beijing. "And with little sign of global inflationary pressure from either labor markets or commodity prices, this global expansion has room to run."

Synchronized growth in most developed markets has meant exports have helped keep the expansion on track, and the effects of property market cooling are yet to kick in. The statistics bureau said the result "provides a solid basis" for meeting the full-year growth target.

"It’s a cyclical recovery story on strong exports and real estate," said Junheng Li, the founder of JL Warren Capital LLC, a China-focused research firm in New York. "Both are the same old growth drivers. Very little supply-side reform and restructuring have been done in the first half."

Excess leverage

The strong data suggest across-the-board robustness in the industrial sector in June, said Zhu Haibin, chief China economist at JPMorgan Chase & Co in Hong Kong. China can aim for faster deleveraging in the real economy in the second half and the leverage ratio will come down significantly this year with nominal GDP growing and credit growth slowing, he said

"It’s a good time for corporates to cut excess leverage, especially for state-owned enterprises," Zhu said. "We’re now in an upward trend of the economy which makes it less painful and much easier to push ahead."

Robust nominal GDP growth — the expansion pace not adjusted by prices — rose 11.1 percent. The GDP deflator, a gauge of economy-wide inflation, came in at 4.5 percentage points. That fast expansion backed by price pressure would help boost corporate profits and government revenue, and help service or cut their debts.

China Daily, the official English-language newspaper, said in a commentary Monday that fending off risks is one of the country’s top priorities, with corporate debt running high, the property market being overheated and excess capacity in some sectors lingering.

"Only through guarding against financial risks can a sound and stable financial sector better fulfill its duty and purpose of serving the real economy," it said.

More details

* In the quarter, output expanded 1.7 percent from the first three months
* Services led year-to-date growth, with the tertiary sector expanding 7.7 percent
* Crude steel production expanded to an all-time high last month
* Consumption contributed 63.4 percent to GDP growth in the first half
* Services accounted for 54.1 percent of GDP value in the first half