Where next for China’s economy?

China’s second quarter growth has proved to be better than expected: GDP grew 6.9% in April-June, matching the figure of the previous three months. These second quarter figures mean that the country is on track to comfortably meet its 2017 growth target of around 6.5%, which would give policymakers room to address big economic challenges ahead of important leadership changes later this year.

Shipping contributed to those second quarter growth figures as a rebound in exports – after years of declines – helped to avoid any broader slowdown in the Chinese economy, despite growth in the country’s property sector cooling this year. Firmer exports and production – and in particular steel – were in part responsible for the increase in growth.

Uncertain times ahead

Yet, analysts believe that the economic momentum will not continue. In a research note, Julian Evans-Pritchard, China economist at Capital Economics, said: “China’s strong first half to the year won’t last. The recent crackdown on financial risks has driven a slowdown in credit growth, which will weigh on the economy during the second half of this year.”

Tokyo-based financial firm Nomura Group added that it expects a “gradual slowdown” in Chinese growth as the property sector is expected to “lose steam” in the second half.

Even the Chinese government is looking to the future with uncertainty, having trimmed the country’s 2017 growth target to around 6.5%, after the Chinese economy grew 6.7% in 2016 – its slowest growth since 1990.

The country’s national statistics bureau spokesman Xing Zhihong, commenting on China’s economy, said to news agency AFP: “The national economy has maintained the momentum of steady and sound development in the first half of 2017, laying a solid foundation for achieving the annual target and better performance.

“However, we must be aware that there are still many unstable and uncertain factors abroad and long-term structural contradictions remain prominent at home.”

Furthermore, firmer steel exports and production could increase trade tensions, given that both the US and China are starting economic talks this week. US President Donald Trump has reportedly put the US trade deficit with China at the top of the agenda in the bilateral talks and the steel trade is seen as a particular point of contention.

The Baltic Capesize Index’s China-bound routes are bucking the trend for the upbeat April-June growth figures, having declined since the beginning of the second quarter. For example, C3 – 160,000mt or 170,000mt iron ore shipment from Tubarao to Qingdao – fell from 16.004 on April 3 to 12.021 on July 14. The Baltic Exchange Panamax – Asia index – 74,000 mt South China, one Indonesian round – also fell from 11469 on April 3 to 9531 on July 14, though it did recover from the second quarter low of 5206 on June 9.

The falling rates no doubt reflect recent concerns regarding the Chinese economy. In May, credit rating agency Moody’s downgraded China for the first time in almost three decades due to concerns regarding its high credit and slowing growth. Then, in July, another credit ratings agency, Fitch Ratings, said that the country’s growing debt could provoke “economic and financial shocks”.

Reducing the damage

But the Chinese already have these financial challenges in their sights. Chinese President Xi Jinping has publicly confirmed that the country’s government will continue to deleverage the economy through prudent monetary policy and through reducing leverage in state-owned enterprises.

Raymond Yeung, China economist for ANZ, said in a research note that the Chinese authorities are ready to intensify financial regulation “unprecedentedly, through a much more centralised and empowered organisational set-up. Debt reduction will become an important consideration in monetary policy.” The economist also foresaw more corporate defaults and a credit policy tightening amongst banks.

Despite the economic deleveraging, however, Mr Yeung said: “We do not think this event will trigger an immediate monetary tightening.”

However, though the financial outlook is weaker, the country is not facing an unmitigated disaster. With policymakers preparing for Chinese Communist Party congress later this year, they will want to avoid any slowdown that reflects badly on President Xi.

Further, at investment management company BlackRock’s Wealth Symposium in May 2017, Richard Turnill, the company’s global chief investment strategist, in response to a question on what BlackRock’s outlook on China was, said that BlackRock was “positive on emerging market equities” and that it was “one of the areas where we see the greatest opportunity”. Mr Turnill also said that “the market is not fully pricing in the risk of a positive nominal growth surprise in China this year”.

If the indication that China is on track to meet its 2017 growth target proves to be a reality, it would have a positive impact on shipping. However, at the halfway point of the year, and with the figures for the next two quarters yet to be calculated, there’s still time for hiccups. Different events set to take place within that time frame, such as the US-China economic talks, could have a marked impact on China’s GDP going forward. Thus, while China’s economy is moving in the right direction, the prospect of it meeting its 2017 growth target – and witnessing economic momentum in the future – is by no means a done deal.