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China’s rebound could stall once this quarter is over

John Wang | Photographer's Choice RF | Getty Images

Just as China's economy is beginning to show some signs of a pickup, allaying fears of a hard landing scenario, economists are already warning that the upturn may be short-lived and could unravel as soon as the current quarter wraps up.

"We do believe the impressive rebound in July will be short lived due to temporary pent-up demand and a structural downward growth trend," Ting Lu, China economist at Bank of America Merrill Lynch (BoFA) wrote in a report published Tuesday.

(Read more: China starts its turnaround, yet skeptics still abound)

The stronger-than-expected growth in industrial production in July, for example, was driven by demand that was suppressed during the liquidity squeeze in June and improved confidence driven by the government's mini package of fiscal stimulus measures, Ting said. This recovery in demand won't be sustained, he added.

BoFA expects gross domestic product (GDP) growth in the world's second largest economy to grow an annualized 7.6 percent in the third quarter, before edging back down to 7.5 percent in the final quarter of the year. The economy logged a 7.5 percent growth in the second quarter, down from 7.7 percent in the three months before.

(Read more: China data blitz points to stabilizing economy)

Wei Yao, economist at Societe Generale agrees there will be "some sun" for China's economy in the third quarter, but sees "big clouds" afterwards.

"The impressive rebound in industrial production growth implies higher third quarter GDP, and makes our 7.5 percent forecast look conservative. However, we still believe the growth outlook beyond third quarter is murky," she said.

(Read more: China market bounce: trend change or false alarm?)

Yao's primary concern centers around a deceleration in credit growth, which she believes will limit the increase in fixed asset investment and threaten growth. Fixed asset investment grew 20.1 percent year on year in the first seven months of the year, staying flat from the figure in the first half.

In July, new loans decreased to 700 billion yuan ($114 billion) from 861 billion yuan in the previous month. Credit from non-bank channels, predominantly from the shadow banking sector and bond market, fell to 109 billion yuan last month from 177 billion yuan in June and 516.6 billion yuan in May, according to Societe Generale.

"This remains the biggest risk factor to economic growth," she said.

Structural limitations

Ting of Bank of America Merrill Lynch argues that China's economy also faces major structural headwinds that will limit its growth going forward. These include factors such as its falling return on capital investment and a declining work force.

(Read more: What if China lands hard? SocGen outlines the scenario)

China's working population, for example, fell by 3.45 million to 937.27 million in 2012, according to figures released by China's National Bureau of Statistics.

—By CNBC's Ansuya Harjani; Follow her on Twitter @Ansuya_H

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