What should we watch for China's 1Q Gross Domestic Product (GDP)?

We saw a sharp rebound of Chinese equity markets recently. One of the key reasons for the rebound is that investors are expecting stimulus package from the National Development and Reform Commission (NDRC). Shanghai Composite Index YTD returned to positive territories, yet still underperforming compared to the MSCI Asia ex-Japan index. The 1Q GDP will be released this Wednesday and it could lead to further speculation regarding its coming infrastructure stimulus package.

We expect that the 1Q GDP growth would be in between 7.3-7.5% this year. If it is true, local authorities would need to respond by slowing down economic growth with more mini-stimulus packages. If not, the economy will fall further for the rest of the quarters. Chinese government has started to withdraw in the 4Q last year, when the economic conditions began its falling trend. Bad weather in U.S. and China for the past months could be one of the reasons, but lack of the policy support is the main reason.

Chinese new government is believed to promote social stability in order to build its credibility. Current situation in China is very complicated. There will not be any perfect policy in near term if they want to achieve both growth and reform at the same time. At this moment, Chinese government will not risk ignoring the growth bottom line. If confidence wanes and triggers a slower growth, it will be much easier to reach a larger credit crisis and bailout costs will be even more expensive, based on previous experiences in U.S. and the Euro Zone. The policy will remain accommodative this year where measures and regulations to “taper the debts level” will be gradually adopted, if the Q1 growth fails to reach 7.5% or above. Stable growth means a higher employment rate, which does not contradict the promotion of consumptions. If growth slows down too much, the officials will react immediately.

Evidence of another wave of stimulus has been seen. Jan-Fed Infrastructure investment grew 18.8% MoM, accelerated after a significant drop in the end of 2013. Railway investment surged leads to “pro-growth” policy to be “believable”. The numbers of the City Investment Bond in China issuance increased significantly, indicating that more infrastructure projects will be introduced in the coming months. China’s rates slid to a one-month low on speculations that the central bank’s money-market operations will add cash to the financial system.