Chinese economic growth set to decelerate in Q4

The Chinese economic growth is likely to have decelerated to 6.7% y/y in the final quarter of 2017. While measures have been taken by China’s officials to promote domestic demand some years ago, the strategy is set to work with domestic demand expected to remain strong in the fourth quarter.

While retail sales are expected to decelerate slightly in December, the sales are still seen retaining a double-digit growth with consumer confidence remaining strong. On the investment side of the Chinese growth story, fixed asset investment is expected to have slowed further to 7.1% y/y in December after People’s Bank of China (PBoC) hiked rates in a move that has basically copied the US Federal Reserve with the monetary policy tightening.
 
While the manufacturing activity measured by the National Bureau of Statistics’ (NBS) manufacturing PMI slowed during the final quarter of last year, the Chinese industrial production is expected to decelerate the growth rate to   6.0% y/y in December as the overcapacity is being continuously scaled back.

On top of it, the export performance remains strong with exports rising way above expectations in recent months and the trade balance recorded above-expectation surpluses.

As a result, the Chinese growth picture remains broadly positive although the economy is deleveraging.

On a risk side, any kind of negative China growth surprises would become a source of major concern in 2018, especially in terms of emerging markets FX, with smaller emerging market economies potentially facing investment outflow pushing their currencies lower. There is no other emerging market economy with that has the potential to cause a wholesale re-rating of future growth than China. In case of stronger deceleration, negative sentiment would spread via commodity and trade channels quickly. Market analysts expect China’s growth deceleration to 6.2% in 2018, as the cumulative impact of shadow banking deleveraging and housing market tightening finally filter through to the economy.