3 economic hurdles China must overcome

An inflation rebound to 2% may be looming ahead as vegetable prices increase.

These are what Morgan Stanley has to say on China economics.

1. We expect to see more signs of growth stabilization in the upcoming August data releases, albeit at relatively low levels: While notable rebounds in the growth indicators are unlikely in August, we are not expecting sharp deterioration either. In particular, IP growth should stabilize at the current low levels, sustaining only low-single-digit sequential growth given the downside surprise in the latest Mfg. PMI output data. Meanwhile, we expect little change in FAI and retail sales growth in August, supported by the on-going fiscal policy easing that will likely boost volume growth, in our view.

2. We see strong headwind on trade growth, but we refrain from extrapolating the weak growth registered in July due to the increased month-to-month volatility in trade data. Specifically, we expect export growth to edge up to +3% YoY in August (vs. +1% YoY in July) while import growth will likely moderate further to +3.5% YoY in August (vs. +4.7% YoY in July).

3. We expect a small rebound in CPI inflation to +2% YoY in August driven by the recent surge in vegetable price increases due to flood-related supply disruption, but reckon that the disinflationary trend is still on track thanks to the favourable carryover effect for the rest of this year. Meanwhile, the lack of recovery in aggregate demand could have led to intensification of PPI deflation in August, in our view.

New loan creation will likely come in higher, in line with seasonal patterns and consistent with the typical pace of quarterly loan disbursement, but will again likely be dominated by short-term loans and bill financing as the banks could have remained relatively cautious amidst the uncertainty in economic conditions.