The Outlook for China's Economy In the Second Half of 2016

Global economic uncertainties have been rising and against that background,the powerful political bureau of the Chinese Communist Party's central committee held a key meeting on the challenges ahead. The political leadership came to four broad conclusions:

First,the leaders agreed that the performance of China's economy in the first half of the year generally met expectations.

Economic growth was 6.7% in the first half of the year,slightly higher than the targeted annual growth rate of 6.5%. Other economic measurements were mixed. While consumption and industrial output were generally steady,fixed asset investment slowed markedly. Foreign trade was weak,with July imports sliding 12.5% year on year in dollar terms,for a 4.1 percentage point deterioration compared with June. Exports in July fell 4.4% year on year,and that was worse than expected.

Nonetheless,the 6.7% economic growth rate was still a solid achievement in the face of a sluggish world economy,considering that China's economy was subject to increased external uncertainties just as efforts were being made to promote structural reforms and adjust to what has been called the "new normal."

Second,the political bureau declared that asset bubbles should be curbed,and it is highly likely that there will be more measures to cool the property market in first-tier cities in the second half of the year.

With the easing of credit and lending policies and a further reduction of interest rates,there were rises in property sales in the first half of the year and that triggered a rebound in land costs and property investment. A loosening of property policies also contributed to the steep rise in prices in first- and second-tier cities. In the first half of the year,asset bubbles increased as prices in first- and second-tier cities surged. There was a heavy influx of capital into the property market,crowding out credit for the real economy.

From this we can see there will be a divergence in property policies over the remainder of the year. Political leaders said that the structure of lending needed to be improved. That suggests that for first- and second-tier cities,there could be adjustments to mortgage policies and a continuation of existing home purchase restrictions. For third- and fourth-tier cities,where there is still considerable pressure from large inventories of properties,a possible solution would be to increase fiscal support from the government to ensure adequate public services for migrants.

Third,stability is extremely important. Political leaders gave special attention to the importance of accuracy in economic forecasts. They stressed transparency,aiming to stabilize market expectations while boosting market confidence through bold reform measures.

The uncertainties on the economic horizon present challenges to stability,and supply-side reforms will result in fresh difficulties. The lack of confidence among entrepreneurs has been made apparent through the continued weakness in investment interest across the private sector. The growing gap between the M1 and M2 money supply measures is a reflection of this