China’s July economic rebound may be short-lived as Citi analysts anticipate the rebound may end around September.
Minggao Shen and the team at Citi Research feel some of the factors that aided economic rebound in July might disappear over time.
China focused on its own infrastructure
The analysts observe that Chinese leaders’ talk of defending growth bottom-line has accentuated commodity prices besides pushing up power consumption.
Citi analysts feel the policy stimulus is likely to be smaller in scale when compared with the second half last year. They feel new projects would be selected primarily in infrastructure projects such as railway, subway and light rail, besides environmental protection and IT.
The analysts point out that with no additional funding or further monetary policy easing, the launch of more infrastructure projects would only crowd out investment elsewhere. Hence the analysts feel the funding constraints could drag down the Chinese economy again during the fourth quarter of this year or during first quarter of next year.
China’s recent power comsumption may be due only to hot weather
Relying on data since 2004, the Citi analysts observe the growth rates of power consumption adjusted for real GDP growth accelerated by 2.25 ppts per degree of temperature increase in Celsius. With the average temperate in China this year being 0.5 degrees higher than last year, the analysts feel this translates to 1.1 ppts acceleration of power consumption growth. Thus, the analysts attribute roughly half of the gain in July power consumption growth could be explained by the hot weather while the rest was due to better growth in energy-intensive commodity production. The analysts feel the higher base could weigh on the economy after the summer.
Minggao Shen and team at Citi observe the uneven recovery among sectors suggest that the base effect is not working universally. The analysts point out that the industrial sales value delivered to exports failed to pick up despite the bottom in July last year. Besides, the trough of retail sales growth last year was in July, but it failed to boost the growth rate last month.
Citi analysts point out the growth of non-SOE investment inched lower, while SOE investment rebounded in July. The analysts feel the non-SOE sector is more sensitive to end-demand including exports.
Increasing cost of capital
After the liquidity squeeze in June, the cost of capital has started rising in China. Citi analysts feel the increased cost of capital would cripple the ability of local governments to fund infrastructure for the rest of 2013. Hence, the analysts feel unless policy easing measures are initiated, local governments for the first time would have to move upslope to fund infrastructure projects.