Good News From China: A Strong Economic Start to 2017

  • Providing a fillip to global sentiment, China’s economic growth picked up in the first two months, reflecting stronger investment and exports as well as restocking in industry, even though consumption growth eased.
  • We now expect GDP growth to slow to 6.5% this year, up from 6.3% in our previous forecast, following the solid data for the start of the year and the signaling of a slightly more dovish policy stance during the recent National People Congress compared to what we had expected.

China should, in principle, benefit from any pick-up in growth in the US from more expansionary fiscal policy under a Trump administration, but its exports will also face a harsher climate

Improved Investment and Export Growth

Investment momentum improved, with nominal fixed asset investment (FAI) growth picking up to 8.9% year-on-year in January-February, from 7.9% year-on-year in Q4 2016 (and from only 6.3% year-on-year in December 2016).

FAI in manufacturing disappointed, but infrastructure FAI growth seems to have been solid.

Meanwhile, real-estate activity surprised on the upside. In spite of purchasing restrictions in large cities and a strong base, housing sales rose 23.7% year-on-year in the first two months of 2017, as sales in smaller cities remained strong.

Housing starts were up 14.8% year-on-year nation-wide in the first two months. Nonetheless, real estate FAI grew little in January-February year-on-year, in part reflecting continued caution of developers.

Goods exports growth rose to 7.0% year-on-year in real terms in January-February, confirming that global demand momentum is strengthening.

However, the expansion of household consumption slowed, with real retail sales growth down top to 8.1% year-on-year in January-February from 9.1% in Q4. Car sales growth slowed to 3.9% in the first two months.

Inventory developments have aided industrial production – the fall of inventories in industry throughout 2016 stimulated production in recent months, although inventories rose significantly in December. In all, growth of industrial value added (VA) picked up to 6.3% year-on-year in January-February.

While mining output continued to fall on a year ago, growth of manufacturing VA strengthened to 6.9% year-on-year.

Below Target Inflation

Consumer price inflation eased notably in February to 0.8% year-on-year from 2.5% year-on-year in January, underpinned by sharply lower food prices following the end of the Lunar New Year holiday.

But the production price index (PPI) rose further to 7.8% year-on-year in February, driven by coal mining and heavy industries. Nonetheless, we expect the spurt in the PPI to run out of steam in Q2 2017, and forecast CPI inflation to remain comfortably below the likely target of 3% in 2017, suggesting no major monetary policy implications.

In February, new bank lending fell markedly to CNY1.17 trillion (from CNY2.03 trillion in January), while total social financing (TSF) also dropped to CNY1.15 trillion after hitting a new record of CNY3.74 trillion in the earlier month.

In the first two months of 2017, the stocks of bank lending and TSF (adjusted for local government bond issuance) rose 12.9% and 15.9% from a year ago, slightly less than the 13.4% and 16.1% in December 2016.

Decent Trade Momentum

Looking ahead, recent global trade indicators show a decent momentum going into 2017. We expect it to grow by 2.7% this year, from 1.4% in 2016. China should, in principle, benefit from any pick-up in growth in the US from more expansionary fiscal policy under a Trump administration.

But China's exports to the US will also face a harsher climate under a Trump administration, which should weigh on export growth. Overall, we expect the export outlook to improve somewhat this year, helped by the 5.7% real trade-weighted depreciation in the year to end-December.

Domestically, we expect infrastructure investment to remain solid, in a year of a major leadership reshuffle. And corporate investment should benefit somewhat from renewed profit growth.

But even though housing activity surprised on the upside in the first two months, we expect the tightening of housing purchasing restrictions in many large cities to weigh on real estate investment this year. We forecast consumption growth to ease on moderating real wage growth, but to remain relatively solid.

We do not expect a benchmark interest rate rise in China this year, and official fiscal policy will also remain supportive

Supportive Fiscal Policy

Meanwhile, the government work report presented at the plenary session of the National People’s Congress (NPC) confirmed a slight shift in policy stance to somewhat more emphasis on reducing financial risks. The GDP growth target was adjusted from 6.5-7% last year to “around 6.5%, or higher if possible in practice” for this year.

The report stressed a “prudent and neutral” monetary policy as the targets for growth of M2 and TSF were reduced from 13% in 2016 to 12% this year. Based on plans for local government bond issuance, we estimate that overall credit growth is targeted at 14.8%, slightly more than we had expected.

We do not expect a benchmark interest rate rise this year, and official fiscal policy will also remain supportive. 

Following the solid data for the start of the year and the signaling of a slightly more dovish policy stance during the recent NPC compared to what we had expected, we now expect GDP growth to slow to 6.5% this year, up from 6.3% before.

High uncertainty calls for vigilance of policymaking. But at least the current growth momentum gives policy some two-way leeway.

About the Author

Louis Kuijs is Head of Asia Economics at Oxford Economics. Copyright © 2017 Oxford Economics. All rights reserved.

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