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1. Page 1 of 2
Economic Commentary
QNB Economics
economics@qnb.com
02 August, 2015
China is set to meet growth targets despite stock market volatility
China’s economy is holding up despite the
recent crash in the stock market, which has
fallen 27% from its peak on 8th
June. Q2 real
GDP growth was released on July 15th
at 7.0%,
above consensus of 6.8% and in line with the
government target of around 7.0% for 2015.
Other economic data has also been positive.
Retail sales and industrial production year on
year growth numbers both picked up in June
having slowed earlier in the year.
Furthermore, property markets have turned a
corner with average prices for new residential
buildings in 70 cities rising in both May and
June, the first time they have risen since April
2014.
Real GDP Growth and Targets
(%)
Sources: National Bureau of Statistics
The solid economic performance has been
enabled by a number of government monetary
and fiscal stimulus measures. The People’s
Bank of China (PBoC) has repeatedly cut both
policy interest rates and the Reserve
Requirement Ratio (RRR) for banks. Since
November 2014, the PBoC has cut interest
rates four times. The lending rate was reduced
from 6.0% to 4.85% currently and the deposit
rate from 3.0% to 2.0%. The RRR was also cut
three times, since February 2015 from 20% to
18.5% currently. The PBoC has also injected
liquidity into banks, expanded lending
facilities to banks and introduced a USD323bn
debt swap programme for local governments
to alleviate their debt burden. These measures
have bolstered bank lending, supporting the
economy. The government has also helped
boost growth through fiscal stimulus,
announcing a steady stream of new transport
projects. For example, the government has
prioritised railway investment, which reached
USD43bn in the first half of 2015, up 12.7%
compared with 2014.
RRR and Policy Interest Rates
(%)
Sources: People’s Bank of China (PBoC)
Nonetheless, a number of downside risks
remain. First, there is considerable excess
capacity in the economy, which is associated
with high levels of debt in local government
and corporate sectors. Investment spending
growth has, therefore, trended downward,
reaching 11.4% in the year to end-June 2015
from 15.7% to end-January 2014. Second,
disappointing purchasing manager’s index
data released last week (48.2 compared with
consensus of 49.7) has increased concerns
7.5
7.0
6.4
6.6
6.8
7.0
7.2
7.4
7.6
7.8
8.0
Q1
13
Q2
13
Q3
13
Q4
13
Q1
14
Q2
14
Q3
14
Q4
14
Q1
15
Q2
15
Target GDP Actual GDP
20.0
18.5
6.0
4.9
3.0
2.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
18.0
18.5
19.0
19.5
20.0
20.5
21.0
Jan-14 Jul-14 Jan-15 Jul-15
RRR (left axis)
Lending Rate (right axis)
Deposit Rate(right axis)

2. Page 2 of 2
Economic Commentary
QNB Economics
economics@qnb.com
02 August, 2015
about growth. Finally, stock market volatility
could have repercussions in the real economy.
The recent astronomical rise in onshore
Chinese equity markets (up 151% in the year
to 15th
June) was followed by a sharp
correction (down 28.0% since mid-June). This
volatility could undermine financial stability
and erode consumer confidence.
To counteract these downside risks, the
government is likely to provide more stimulus
to the economy during the second half of the
year for a number of reasons. First, it is likely
to be needed to meet the growth target of
around 7%. Second, the authorities have
demonstrated the commitment and capacity to
support the economy. Third, with almost
USD4tn in international reserves, the
authorities have plentiful resources at their
disposal to provide substantial stimulus.
Finally, inflation is currently 1.4%, well below
the target of around 3.0%, leaving plenty of
room for monetary stimulus. Therefore,
additional RRR and interest rate cuts as well as
an expanded local government debt swap plan
and more fiscal stimulus measures can all be
expected during the second half of the year.
Additionally, the government has introduced a
number of measures to directly support the
stock market. The PBoC has said it will provide
ample liquidity to the stock market to ensure
no systemic risks. For example, it has provided
liquidity support and a USD12bn capital
injection to a state run securities company, the
Chinese Security Fund, which invested
USD32bn in equity funds on 8th
July alone.
Other measures include providing at least
USD200bn of liquidity to brokerages, halting
initial public offerings and encouraging
government organisations to buy shares,
including state insurance and pension funds as
well as state-owned-enterprises. With such
strong support for both the economy and the
stock market, we still expect China to meet its
growth target of around 7% in 2015 despite the
downside risks.
QNB Economics Team:
Ziad Daoud
Acting Head of Economics
+974-4453-4642
Rory Fyfe*
Senior Economist
+974-4453-4643
Ehsan Khoman
Economist
+974-4453-4423
Hamda Al-Thani
Economist
+974-4453-4642
Rim Mesraoua
Economist – Trainee
+974-4453-4642
* Corresponding author
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