Chinas economy recorded year-on-year growth of 6.7% in the second quarter

China's economy recorded year-on-year growth of 6.7% in the second quarter

Although China's economic growth beat expectations in the second quarter, the country's industrial economy is showing signs of a slowdown due to lack of investment and overcapacity, a new report suggests. 

The study of over 2,000 industrial firms nationwide, published by the Cheung Kong Graduate School of Business (CKGSB), found China's economy recorded year-on-year growth of 6.7% in the second quarter. But while this was better than expected, the country's industrial economy remains at the bottom of an "L-shaped" economic trend, Gan Jie, professor of finance at CKGSB says. 

Jie says China's supply-side reform, which was initiated last year to tackle industrial overcapacity, has now made some progress, but overcapacity and weak demand are the biggest challenges facing the industrial economy.

Around 60% of firms surveyed reported an oversupply in the domestic market in the second quarter, hitting an historical high, the report said. Around 81% of the companies cited a lack of orders as the key factor limited production in the quarter, with labour cost and raw material among their other concerns (cited by 19% and 13% respectively).

Compared to the previous quarter, the number of firms expressing concerns about both the macro economy and government policy as constraining factors for future production rose from 2% to 12%. 

With regard to current operating conditions, only 14% of surveyed firms replied "good," 79% replied "neutral" and 7% replied "difficult."

According to the report, the sluggish pace of investment is unlikely to improve in the near future either, with only six firms, accounting for 0.3% of the companies polled, saying they plan to make investment in the third quarter. 

The research also notes the government's latest stimulus round, focused on loosening monetary policy and infrastructure investments, has resulted in a large amount of credit entering real estate and commodities, rather than the real economy, causing a rapid run-up in asset prices, Jie says. 

She warns that inflation remains a long-term concern for China. "Government investments are being made into infrastructure, but as private investment continues to decline, it is clear that monetary and fiscal stimuli alone cannot revive the industry given the severe overcapacity that exists."

But despite all the challenges, Jie is optimistic there are still a number of growth drivers for China, such as the development of new industries, state-owned enterprise reform, and urbanisation.