The financial sector has been a key contributing factor to GDP growth, but it may take a hit due to the stock market turmoil, according to Axa Investment Managers and Schroder Investment Management.
During the second quarter, the financial sector performance was boosted by rising activities in the equity and housing markets, noted Aidan Yao and Shirley Shen, emerging Asia economists at Axa IM, in a China report.
China’s liquidity-driven market rally started to correct recently as retail investors hurried to unwind their leveraged positions.
“As the stock market cools off, the financial sector growth will fade, exerting downward pressure on the economy in the second half,” said Yao and Shen.
Source: Axa Investment Managers
Source: Axa Investment Managers
Craig Botham, emerging markets economist at Schroders, expressed a similar view.
“We do not see much in the data to encourage us about the economy’s future. The performance in Q2 looks to have been built upon shaky foundations, rather than the solid rock of self-sustaining growth,” Botham said.
First quarter growth was on the back of a strong performance by the finance industry during the market rally and brokerage incomes have likely outperformed again for most of the second quarter despite the halt to the rally in mid-June, he added.
“GDP growth built on an equity market bubble is unsustainable,” said Botham.
“The biblical house built upon sand ultimately fell with a great crash as the weather turned against it – the same fate may not await China, but all sandcastles ultimately crumble,” Botham added.
Despite a likely setback from the financial sector, the government’s recent supportive measures should underpin growth momentum in the third quarter, according to Axa IM.
“We think the authorities will stand ready to act if the official growth target comes under threat.”
In March, China pegged its full-year growth target for 2015 at 7%, lower than the 7.4% achieved a year ago. The 7.4% growth in 2014 was the slowest growth in 24 years.
