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China Beige Book shows rebound from recent lows as services gain

China's economy showed new strength in the second quarter, according to the latest China Beige Book, signaling a sharp reversal from the weakness in the preceding six months.

[BEIJING] China's economy showed new strength in the second quarter, according to the latest China Beige Book, signaling a sharp reversal from the weakness in the preceding six months.

Services and construction helped spur the return to moderate growth, according to the private survey released by the New York-based research group CBB International, which collects anecdotal accounts similar to those in the Federal Reserve Beige Book.

"The economy bounced off the lows of the last two quarters, notching an across-the-board improvement," CBB president Leland Miller and chief economist Derek Scissors said in a report.

"The rebound constitutes a performance roughly echoing that of a year ago."

Services have a chance to hold up over the longer term as a source of sustainable growth that helps continue the economic transition away from the old industrial drivers, according to the report.

 Though it's a difficult performance to replicate, more consistent results like that would confirm "China is on the right track" and that services can help support growth as policy makers address excess manufacturing capacity," CBB said.

"Services returned to the position of growth leader - with a vengeance," Miller and Scissors wrote.

"Not only did services revenue, hiring, capex, and profits all improve on a poor Q1-16 - no surprise there - they all improved from a year ago. And they all outperformed the national numbers."

It wasn't all good news. The report also noted that output, new domestic orders, receivables, and payables all weakened over the past year. Construction was also a source of growth, though that's not as sustainable as services over the long run.

The widespread improvement in the second quarter followed the two weakest quarters in the history of the CBB report, which the researchers said showed a return to approximately the speed of a year ago. The prior Beige Book report was also at odds with official data that showed indicators stabilised in the first months of this year.

Growth in the world's second-largest economy slowed to 6.7 per cent in the first quarter, the weakest expansion since 2009. Second-quarter growth is projected to have slipped to 6.6 per cent and will keep decelerating to 6.5 per cent in the following two quarters, according to a Bloomberg survey of economists before the government's official report scheduled for July 15.

Bloomberg Intelligence economists Fielding Chen and Tom Orlik forecast growth will slow to 6.7 per cent this year and 6.3 per cent next year, according to a report on Wednesday (June 29).

They also forecast the potential impact of the UK vote to leave the European Union, estimating that every one percentage point drop in world trade could reduce China's economic growth by 0.5 percentage point, prompting a stimulus response from policy makers.

CBB said investors should "consider Brexit fallout as a potentially serious downside risk to the Chinese economy."

While the vote itself has little impact on China, global responses "could put pressure on export-sensitive sectors and financial decision-makers." The Beige Book also cited resurgent strength in property, which posted the best overall performance in the second quarter since 2013.

"Residential realty and residential and commercial construction all reported multi-year growth highs and only weaker commercial realty threw a damper on the party," the analysts wrote.

All city sizes showed improvement both compared with the previous quarter and year-ago levels, led by the largest cities, they said.