China in for short-lived economic recovery

Positive growth metrics mask the uncomfortable reality that a recovery of China’s economy in the second half will be temporary.

Analysts warn a rebound in China is likely to be short-lived despite optimistic developments such as bank loan growth and easing inflation.

“There is less space for a credit-fuelled investment boom now than four years ago and less appetite too, since the costs to financial stability and local government finances are better understood,” they wrote.

This warning comes as economists see the third quarter as offering better prospects, with China’s economic growth rising to 7.9% and to 8.2% in the fourth. This could be brought about by Beijing’s steps to boost growth. Among these are recent interest rate cuts and cuts in banks’ reserve ratio requirement.

The pace of lending by China’s Big Four state-owned banks doubled in the first half of July from a month earlier, In June, total lending by Chinese banks reached US144 billion, according to the People’s Bank of China.

The volume of property sales has started to recover recently and prices are also rising. A significant rebound in prices, however, seems unlikely since developers’ inventories of unsold property are high and still rising. Inflation is cooling faster than expected, providing sufficient room for further policy.

China worried markets earlier this month when official figures showed it had grown at just 7.6% in the second quarter, the slowest pace in three years.