China headed for long-term structural imbalance: Fitch

Renewed reliance on investment to support activity threatens to prolong the Chinese economy's structural imbalances.

On the other hand, China will likely see a soft landing despite the slowdown in growth evident in Q212, according to a new report from Fitch Ratings.

"Official figures indicate that the Chinese economy is likely to avoid a hard landing in the short-term. China's growth slowed to 7.6% in Q212, the weakest reading since Q109," it said. Fitch maintains its 8% projection for Chinese growth in 2012, implying annualised growth of 8.1% in H2.

"Fixed asset investment growth picked up to 20.4% yoy in the six months to June 2012, up from 20.1% in the five months to May. Residential construction remains weak, but items related to infrastructure, such as utilities and transport, performed more strongly. Official data continue to record a surplus of vacancies over jobseekers in the cities, while income growth is holding up. Export growth is outpacing imports despite weak global growth. Monetary policy has been supportive, with two benchmark rate cuts in June and July. New bank lending of RMB920bn outperformed analysts' expectations in June," Fitch said.

"Statements by senior officials including Premier Wen Jiabao have pointed to renewed emphasis on investment to support growth in the remainder of the year. An investment-led strategy backed by monetary easing is likely to avoid a 'hard landing' in the short term," it said.

"Gross domestic capital formation reached 46.2% of China's GDP in 2011, up sharply from 40.5% in 2008. However, this investment-led strategy is likely to be at the cost of postponing resolution of the economy's structural imbalance towards investment. Moreover, the rise in investment as a share of GDP since 2008, which is inherently unsustainable, has coincided with deteriorating efficiency as measured by the ratio of incremental output per unit of investment. The risks attached to rebalancing China's growth are a structural weakness weighing on the ratings," it added.

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