A common assumption has held that Chinese authorities acted decisively to shore up growth early in 2016 by authorizing an aggressive expansion of credit funding new infrastructure construction, and that this program can explain the stabilization in GDP growth this year.
In this note, we argue that this assumption should be questioned. There is no doubt credit expanded sharply early this year, but most credit and activity growth can be explained by the property sector, not government stimulus. Therefore, trends in the property market, and credit to the property sector, are more critical for the macroeconomic outlook in the second half than policy signals related to infrastructure spending. There are notable signs that property price growth is already weakening at present, and that purchases and construction activity will decelerate if overall credit growth softens.
