China’s GDP growth holds steady

The world’s second largest economy grew at the steady pace of 6.8%y/y in the first quarter of 2018, in line with estimates, and making it the third-straight quarter of 6.8% expansion. Industrial production came in slightly on the soft side in March, printing at 6.0%y/y versus 6.3% expected, while retail sales beat expectation, rising 10.1%y/y versus 9.7% median forecast.

As usual, China displays solid growth figures and this despite of a gentle overall slowdown. Indeed, only a year ago industrial production was growing at an annual pace of 7.6%, while retail sales rose 10.9%y/y. However, one has to keep in mind that Beijing is trying to deleverage its economy and deleveraging inevitably leads to slower growth. Fixed asset investment rose 7.5% in the March quarter, 40bps lower than expected by market participants. State fixed assets investment fell to 7.1%y/y in March, down from 9.1% in February and 10.1% in January, while private investment has been surging continuously since mid-2016, which confirm that the government is working actively at normalising its economy.

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We wouldn’t say that the outlook is not rosy for China but this year will definitely be more challenging. First the deleveraging effort will continue. Second, the real estate market, which was historically one of the biggest growth driver, will continue to slow down. Finally, the normalisation that is underway - i.e. shifting toward a domestic generated growth from an export driven one – will also affect growth to the downside. However, Chinese institutions will work side by side to soften the negative impacts. Therefore, and in spite of this slightly less bright outlook, we remain confident that China will remain the main growth driver.