China: Economy appears to be stabilizing - Wells Fargo

According to analysts from Wells Fargo, data from last week suggests that the Chinese economy is stabilizing but they see growth slowing over time.

Key Quotes:

“Data released this week showed that real GDP in China grew 1.8 percent (not annualized) on a sequential basis in the second quarter. Not only was the outturn stronger than the 1.2 percent growth rate that was registered in Q1, but it was stronger than the consensus forecast.”

“In short, it appears that the Chinese economy is stabilizing. High-level disaggregation of the GDP data into industry sectors offers some clues into the current state of the Chinese economy. Although the year-over-year growth rate in the “tertiary” sector (i.e., the service sector) edged down to 7.5 percent in Q2 from 7.6 percent in Q1, growth in the “secondary” sector, which combines the industrial and construction sectors, strengthened to 6.1 percent from 5.8 percent.”

“Although the Chinese economy seems to have achieved a “soft landing,” which stands in marked contrast to some of the worst market fears last autumn, a return to double-digit rates of economic growth is just not in the cards.”

“We remain concerned about the long-run outlook for the Chinese economy. Although we do not think it will collapse anytime soon, we believe that it will continue to decelerate in coming years.”

“Our concern centers around the long-run viability of the inefficient state-owned enterprise (SOE) sector. As we wrote in a recent report, we think that it will be politically difficult for the government to close down struggling SOEs. Over time, capital will be misallocated toward inefficient firms rather than more dynamic ones. In our view, Chinese economic growth will slow even further over time.